Social Cost of Monopolization

  • We use deadweight loss as a basic measure of social welfare.
  • Some economists believe that the traditional analysis done in the previous slide may understate the actual social cost of monopolies.
  • This analysis depends upon the fact that the excess profits enjoyed by the monopolist will induce other firms to compete for those excess profits
    • This is called rent-seeking behavior
    • Any cost incurred in the competition to maintain or obtain monopolistic position is called cost of rent-seeking.
    • Examples include monopolist investing in R&D to obtain a patent or accumulate capital to increase barrier to entry, and entrants investing in resources while attempting to enter the market.
    • The opportunity cost of wasted resources = additional social cost

Obtaining a monopoly is itself a competitive activity, so that, at the margin, the cost of obtaining a monopoly is exactly equal to the expected profit of being a monopolist. An important corollary of this assumption is that there are no intramarginal monopolies-no cases, that is, where the expected profits of monopoly exceed the total supply price of the inputs used to obtain the monopoly. If there were such an excess, competition in the activity of obtaining the monopoly would induce the competing firms (or new entrants) to hire additional inputs in an effort to engross the additional monopoly profits. (Posner, 1975)