Is monopoly truly effective for producers?

Abstract

Purpose

The paper is devoted to modeling a pricing policy of competitive firms in a “closed” economy framework.

Design/methodology/approach

The proposed model can be regarded as an analog to CGE model and is based on the intersectoral balance methodology incorporating linear demand functions for goods and services.

Findings

By performing different model experiments, we show that a certain degree of competition can bring more profit to all competing firms, than in case of complete absence of such competition, what is also supported by empirical investigation. This finding implies that monopolies may perform worse than competitive firms, what contradicts with the modern provisions of economic theory, stating that monopoly is the most lucrative type of market structure for a producer. The discovered effect occurs due to the aggressive pricing policy, adopted by monopolies, spurring up the inflation spiral, which is most obvious if monopolies are strongly interdependent in terms of production matrix. This inflation spiral drives prices too high, what negatively reflects on firms’ costs and, consequently, results in monopolies receiving less profit.

Originality/value

The proposed model can also be useful for understanding and assessing various economic consequences after different external or internal shocks, what is especially crucial when conducting monetary or fiscal policy.