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Monopoly, rent-seeking, and second best theory

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Abstract

In the context of a simple general equilibrium model, in which there is a profit-maximizing monopolist, we show that in general the introduction of rent-seeking does not restore the first best pricing rule for the undistorted industry. This result is in direct contrast to that obtained when one assumes that the monopolist follows a full cost pricing rule with a constant markup ratio. Furthermore, it still holds even if the full cost pricing rule is profit-maximizing. We also investigate the conditions under which the first best pricing rule is reinstated for the undistorted industry.

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Authors and Affiliations

  1. Department of Economics, York University, 4700 Keele Street, M3J 1P3, North York, Ontario

    Roger Latham & Frances Perivancic

Authors
  1. Roger Latham
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  2. Frances Perivancic
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Additional information

The authors are grateful to Mahmudul Anam and Eliakim Katz for constructive comments on an earlier version and to Barry Smith for helpful conversations. However, the usual caveat applies.

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Latham, R., Perivancic, F. Monopoly, rent-seeking, and second best theory. Public Choice 70, 225–237 (1991). https://doi.org/10.1007/BF00124484

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  • DOI: https://doi.org/10.1007/BF00124484

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