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Competition, Economic Profit, and Political Capture

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Author Info
Richard Carson () (Department of Economics, Carleton University)
Abstract

This paper gives a revised theory of monopoly, on the assumption that the monopolist receives political favours in exchange for extending political support. In one case, the monopoly profit just equals the value of the monopoly's contribution to the government's support. Monopoly output may be higher or lower than the output associated with marginal-cost pricing, and higher or lower than this sector would supply in a reference economy operating under all-around perfect competition. The monopolist may also use more labour and/or capital, even if its output is lower. In general, the monopoly does not minimize the cost of its output, and it may waste resources in production, as well as in rent-seeking. A shift of product demand away from the monopoly does not necessarily cause the monopolist to release resources that it is wasting. On a more positive note, there are conditions under which the economy with one monopoly and one competitive sector will reach a second-best solution, or an optimum taking the level of monopoly profit as given, but these conditions are severe and the cost of monopoly may still be high.

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Publisher Info
Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 02-09.

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Length: 25 pages
Date of creation: 01 Jul 2002
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Publication status: Published: Carleton Working Paper
Handle: RePEc:car:carecp:02-09

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Related research
Keywords: political capture; monopoly; competition;

Find related papers by JEL classification:
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
D60 - Microeconomics - - Welfare Economics - - - General

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. H. Scott Gordon, 1954. "The Economic Theory of a Common-Property Resource: The Fishery," Journal of Political Economy, University of Chicago Press, vol. 62, pages 124. [Downloadable!] (restricted)
  2. Cassing, James H & Hillman, Arye L, 1986. "Shifting Comparative Advantage and Senescent Industry Collapse," American Economic Review, American Economic Association, vol. 76(3), pages 516-23, June. [Downloadable!] (restricted)
  3. Acemoglu, Daron & Robinson, James A, 1999. "Inefficient Redistribution," CEPR Discussion Papers 2122, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January. [Downloadable!] (restricted)
  5. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-27, August. [Downloadable!] (restricted)
  6. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September. [Downloadable!] (restricted)
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  7. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June. [Downloadable!] (restricted)
  8. Babcock, Linda C & Engberg, John & Glazer, Amihai, 1997. "Wages and Employment in Public-Sector Unions," Economic Inquiry, Oxford University Press, vol. 35(3), pages 532-43, July.
  9. Olivier Blanchard & Andrei Shleifer, 2000. "Federalism With and Without Political Centralization. China versus Russia," Harvard Institute of Economic Research Working Papers 1889, Harvard - Institute of Economic Research.
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