Monopolistic Behaviour and the Good Society; An Empirical Analysis of Monopoly Power and Social Good

Abstract

There is an overwhelming body of Economic theory that studies monopolies and for a good reason: a monopoly is prone to taking advantage of consumers. With the proliferation of information on a global scale, bad societal outcomes are more difficult to hide, arguably keeping in check firms with monopoly power. Theoretical analogy between economic value added and excess profits, assuming CAPM holds allows us to find a reasonable proxy for realized monopoly power profits by computing the difference the return on invested capital and the weighted-average cost of capital. In combination with the proven measurements of accounting profitability, market shares and concentration ratios, this paper argues that constrained monopoly power (given the visibility into firms in the Internet Age) is good for society. Results show that firms with monopoly power tend to be more socially responsible but in aggregate across industries and industry group the net benefit for society is marginal.