This paper develops a theory of politically-active monopoly, which trades political support to the government in exchange for political favors that increase its profit. Because a larger size means a greater ability to extend support, it also means a greater ability to capture political favors. Thus the monopoly here sets output above the level where marginal cost equals marginal revenue and may produce where price is less than marginal cost, since it faces a trade-off between political and market power. However, the size constraint on monopoly rent-seeking may remove its incentive to minimize cost and could even cause it to waste inputs. In addition, rent-seeking uses scarce resources that could be producing useful products, and the management team able to obtain the most efficient production may not be the management able to earn the highest profit, because efficiency in rent-seeking also counts. Thus while the monopoly here uses more resources than a conventional monopoly, it may still supply less output. However, if the government’s political support is sufficiently sensitive to the cost of monopoly, we can expect a relatively optimistic outcome, in which the traditional “deadweight loss” triangle vanishes, although in general the resulting allocation of resources is no better than a second best.

Additional Metadata
Keywords political capture, monopoly, competition
JEL Monopoly (jel D42), Welfare Economics: General (jel D60)
Publisher Department of Economics
Series Carleton Economic Papers
Carson, Richard L. (2002). Competition, Economic Profit, and Political Capture (No. CEP 02-09). Carleton Economic Papers. Department of Economics.