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This note aims to discuss the economic perspective of the social costs of monopoly and regulation. First, it sketches a well-recognized argument in the economic literature1, law practice, and various public policy perspectives. Second, it defines the three building-block assumptions for the argument and provides four remarks on them. Third, it concludes and provides a guidance to a needed correction in social cost measurement given contemporary regulatory framework.
The deadweight loss, represented by the loss of consumer surplus that is not transferred to the monopolist, was the focus of long-standing literature about the social costs of monopoly.2 Mainly, the monopolist decreases output, causing a loss in consumer surplus as some consumers cease purchasing (or purchase less) the product. The monopolist cannot capture this loss; she cannot increase profit from the sales she does not make because she has reduced her output to increase her profit. Hence, the term ‘deadweight’ loss is used—the monopolist has no offsetting benefit.
A key concern is the significance of including measurements of social resources lost within rent-seeking activities. There is a reasonable belief that the social costs of monopoly, as measured by deadweight loss, are understated. The social costs of monopoly are between 5% and 32% of the revenues in cartelized industries (Stocking and Watkins, 1946; and Posner, 1975). Three assumptions characterize this empirical establishment and are mainly used by Posner (1975). The first two assumptions mainly say that the social costs increase due to the costs to become a monopolist. The third assumption, however, matches no additional social returns to the additional costs. This note provides four comments on these assumptions.
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