Dominant firms, price leadership and the measurement of monopoly welfare losses

The possible welfare losses associated with monopoly power have been the subject of numerous studies over a number of decades. Recent estimates seem to confirm the earliest estimates which suggested that such losses were relatively trivial. This paper suggests that the basis of such estimates is questionable. In particular it is argued that the familiar dominant firm - price leadership model is not well suited to the task of estimating monopoly welfare losses. More appropriate assumptions are identified and their implications for assessing the magnitude of potential welfare losses are illustrated. © 1997 Elsevier Science B.V.