The Public Policy Implications of the Persistence of a Monopoly Versus a Duopolistic Market

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In this paper, the welfare implications of a market environment where a new technology which reduces the cost of production that can be exploited by a preempting monopolist which obtains a patent or allows a potential entrant to share the market are investigated from a public policy point of view. The well known efficiency effect indicates that the private incentives of the monopolist are greater than those of a new entrant. However, since the consumers’ benefits are higher under the two-firm market structure compared to those under the pure monopolist situation, it was interesting to examine the overall welfare results further. In neither of these two market structures was the welfare of the society found to be uniformly superior to the other. Therefore, the implications for government regulation are to allow the monopolist to reign if it introduces a significant technological cost reduction, and to promote the competition if the new cost-saving technology is small. An example from Turkey is given where in 2007 Royal Dutch Shell won a tender and acquired a portion of piped gas distribution from a giant Turkish formerly monopolist state company.

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persistence of monopoly , duopoly , cost reducing new technology , consumers’ surplus, welfare.

Bogazici Journal

79

Bogazici Journal