The Effects of Demonopolization on the Aggregate Stock of Capital and the Welfare of a Society

Abstract

A policy intended to change market structure into a more competitive direction, such as the dissolution of firms, seeks to decrease the welfare loss caused by market power of the oligopolistic firms. However, if changing relative prices affects the level of capital stock of an economy as a whole in the long-run, it is not clear whether a policy to decrease market power increases the welfare of the economy in the long-run, since the studies of the impact on welfare of a change in the degree of market power assume that the aggregate stock of capital is kept constant in the long-run, even if the relative price structure is changed by an industrial policy such as the dissolution of firms. In this study we eliminate the unrealistic assumption of a constant stock of aggregate capital and discuss the long-run effects of demonopolization on the welfare of a society. There have been two distinct approaches that have been used in the past to analyze the welfare costs of price distortion. The first approach [2; 3; 6; 7; 9; 15] examines the problem using the two-sector model of general equilibrium. The second approach [5; 8; 10; 11; 12; 13; 14] treats the welfare costs of price distortions as the sum of losses in producer's and consumer's surplus. By changing the relative price of the products in an economy, a policy to decrease market power must in practise affect the important macroeconomic variables including the demands for the products of the competitive sector as well as of the oligopolistic sector and the levels of capital stock in the respective sectors. The macroeconomic variables are interrelated and therefore, in order to see the long-run effects of an industrial policy we have to take all the consequent changes in these macroeconomic variables into account. This consideration suggests that the effects of an industrial policy should be elucidated by analyzing the changes in the long-run equilibrium of a macroeconomic model. Therefore, in the present study we propose a macroeconomic model which consists of the two sectors: the oligopolistic and the competitive sectors. The results obtained will indicate that the impact on welfare of a policy to abate the degree of monopoly depends on the relative capital intensities of the two sectors. We can show that under the assumption of a constant rate of in-