The Social Costs of Monopoly and Regulation: A Game-Theoretic Analysis
Suppose that a regulatory board meets every period and assigns the monopoly franchise for an industry to one of a competing number of entrants; the successful firm then earns It dollars in monopoly profits for that period. The theory of rent-seeking suggests that firms will in the aggregate spend some fraction of π dollars competing for the franchise by hiring lawyers, making presentations, etc. To the extent that these resources are misallocated, they represent a social cost of monopoly in addition to the normal deadweight loss.
KeywordsSocial Cost Fixed Cost Innovative Activity Symmetric Equilibrium Aggregate Expenditure
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