The Microeconomics of Monopoly Power

The purpose of this paper is to outline a consistent microeconomic theory of the firm based on the concept of monopoly power. It builds on the heritage of Post Keynesian authors, Robinson, Kaldor, and Kalecki, but literally extends the theory in several directions. First, monopoly power is defined formally in terms of substitution. In this way, monopoly power is recognized as a fundamental characteristic of a firm which in turn affects other aspects of its behavior. Also in this theory, the relationships between monopoly power, demand elasticities, markups, total profits, and the distribution of profits, are traced systematically. Before turning to the theory it is important to point out that I have benefited as much from the mistakes of my predecessors as from their genuine insights. Kriesler (1987), for example, noted that Kalecki created considerable confusion by failing to clearly distinguish between the degree of monopoly and the markup. This problem is resolved here by defining monopoly power in terms of substitution and identifying it as one of several determinants of the markup. It is always easier to recognize a problem like this one and propose a solution when someone else has stumbled across it first.

Working Paper No. 36(1.40 MB)