Rent dissipation through self-regulation: The social cost of monopoly under threat of reform

This piece offers an alternative perspective on the social cost of monopoly and rent seeking. An existing monopolist whose right is contested in a political market has an incentive to expend resources on direct lobbying efforts while also attempting to defuse reformist opposition. Because the strength of reformist opposition will generally be a function of the monopolist's past, present, and expected future pricing/output decisions, such opposition is endogenous. The probability that an existing monopoly right will be retained depends on both direct lobbying efforts by the monopolist as well as the strength, resolve, and cohesiveness of the reformers. By modifying its output/pricing decision and, in effect, engaging in self-regulation, the monopolist gives up current profits in exchange for the expected future profits associated with retaining its monopoly rights. Such opposition dissipating effort is a form of indirect rent seeking that is complementary to direct lobbying efforts. And unlike the Tullock costs implied by the incumbent's direct lobbying, this form of indirect rent seeking may imply a reduction in the social cost of monopoly.