A Static General-Equilibrium Model in which Monopoly is Superior to Competition

We study social welfare under monopoly using a version of the Kelton and Wallace (1995) two-good general-equilibrium monopoly production model. Individuals are heterogeneous with respect to preferences. They have identical production technologies and labor resources, but only a fraction of them share a monopoly license to produce one of the goods. Numerical evidence indicates that social welfare is higher under monopoly than under perfect competition for a surprising number of parameter combinations – particularly when productivity is relatively low for the monopolistically produced good. Numerical examples illustrate and contribute to our understanding of this result.