Monopoly and competition in addictive markets

This paper models monopoly markets on which demand is addictive as defined by Stigler and Becker; and hence dynamic. It is shown that the monopolists' equilibrium is unique and stable and the time path taken to reach it is also unique. The comparative statics and comparative dynamics of these markets are analysed. It is proved formally that the harmfully (beneficially) addictive monopolist will produce to the left (right) of the equality between marginal revenue and marginal cost, and that the latter may produce where marginal revenue is negative. The model is applied to policy problems in drug-related crime in both long and short runs under monopoly than under competition. The reverse holds true under demand-directed policies. Demand-directed polices cause less crime than supply-directed policies whether competition or monopoly obtains.

A hard copy is available in UCD Library at GEN 330.08 IR/UNI