Strategic Buyers and the Social Cost of Monopoly

Competition for a monopoly position with known profitability is often analyzed as a rent-seeking game, in which the potential producers spend resources in order to obtain the monopoly. Because of such expenditures, the social cost of monopoly is commonly argued to equal the sum of “Harberger costs” (i.e., the deadweight loss) and “Tullock costs” (the expected sum of expenditures on rent seeking).1 Recently, several writers have recognized that buyers do not always passively accept monopoly pricing. On the contrary, buyers often engage in costly rent-defending activities, such as persuading authorities to regulate the price and quality 2 of the monopolized good. This occurs not only when the product is an intermediary good sold to a few industrial buyers, but also when consumer organizations engage in legal proceedings and political lobbying on behalf of otherwise disparate and uncoordinated buyers.