Monopoly, Rent-Seeking, and Second Best Theory

Roger Latham and Frances Perivancic

Public Choice, 1991, vol. 70, issue 2, 225-37

Abstract: In the context of a simple general equilibrium model in which there is a profit-maximizing monopolist, the authors 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. The authors also investigate the conditions under which the first-best pricing rule is reinstated for the undistorted industry. Copyright 1991 by Kluwer Academic Publishers

Date: 1991
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