Competition, Economic Profit, and Political Capture

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