Another Perverse Effect of Monopoly Power

We show that the simple fact that a monopolist sells a good in units which are indivisible may well induce him to select a quality for his product which is not the highest one, even if no cost of any sort is attached to quality improvement. ∗CORE, université catholique de Louvain †CEREC, Facultés universitaires Saint-Louis & CORE, université catholique de Louvain 1. Even leaving aside price discrimination, the list of perverse effects of monopoly power identified by economists is already impressive. To our surprise, the following note reveals that a new item should be added to it, in circumstances in which intuition would have predicted the contrary. The first item on the list is certainly the fact that a monopolist sells too little an amount of the good he produces, and at a too higher price, compared with the amount and the price which would be optimal from the viewpoint of consumers. Also, when the monopolist sells several variants of the same product, the range of variants he decides to supply generally differs from the range which would maximise consumers welfare ; sometimes he offers too many variants, sometimes too few of them (Gabszewicz (1983)). Several perverse effects have also been listed, which are related to the quality of the product which is selected by the monopolist (see Tirole (1988)). In particular, when the cost of producing a good depends on its quality, the monopolist selects a quality which differs from the quality which would be optimal to produce, given the relationship between cost and quality, and taking again consumers welfare as criterion. Yet, when the unit production cost of a product does not increase with its quality, it seems obvious that it is always optimal from the viewpoint of the monopolist to select the top quality among all the variants which are available to him. The intuition behind this statement is that the willingness to pay of consumers necessarly increases with quality, and thus the price at which the monopolist would maximise revenue. Since by assumption there is no restraint coming from cost increase related to quality improvement, the monopolist should always increase his profit when improving the quality of his product. Thus, at least in this extreme case, it seems that both the monopolist and consumers share parallel interests : what is optimal for the latter, is as well optimal for the former. Still in other words, monopoly product selection here appears as immune against the usual perverse effects which so frequently conduce to welfare disappointing results. Unfortunately, the present note reveals that, even in this most favourable case, our basic intuition must be subject to qualification. We show indeed that the simple fact that the monopolist sells a good in units which are indivisible may well induce him to select a quality for his product which is not the highest one, even if no cost of any sort is attached to quality improvement. Thus, as a by-product, our analysis also puts in evidence that the list of perverse effects of monopoly power is probably far from being closed !