Is competition necessarily beneficial for consumers?
Niall Douglas

Firstly, I shall summarise the Neo-Classical Economic interpretation of the maximisation of social welfare through the concept of perfect competition versus monopolies. Secondly, I shall state a range of empirical evidence drawn from various sources negating the Neo-Classical interpretation, from which it shall become clear in what situations the Neo-Classical model fails. Lastly, I shall outline a game theory explanation of the typical case where monopoly invariably outperforms competition.

The Neo-Classical Economic Interpretation
According to this interpretation, social welfare (in the sense of maximising allocative efficiency1) is maximised only under perfect competition where infinitely tiny (relative to all other competing) firms are price takers2. In contrast, monopolies, whom are price setters through their ability to affect their market, create a deadweight loss to society as output is lower than is socially optimal3.

This model is summarised by the top graph in Figure 1 below where Pm and Qm are aggregate equilibrium price & quantity for monopolies and Ppc and Qpc are for perfectly competitive firms. The graph on the bottom is that for a single perfectly competitive firm, with its straight line fixed price.

1

By ‘allocative efficiency’ I mean reaching a Pareto Efficient Optimum whereby any further change would make the

aggregate of consumers and firms (ie; society) worse off according to the model.
2 3

Where Price = Marginal Cost = Marginal Revenue and thus no economic profit is made in equilibrium. Where Price >= (Marginal Cost = Marginal Revenue) and thus a sustained economic profit is made.

Figure 1: The Neo-Classical interpretation of competitive firms and monopolies

Much of this interpretation requires an upward sloping supply curve, something unusual in