Market Failure Due to Monopoly 449monopoly level. Accordingly, smaller deadweight losses occur under these mar-
ket conditions. The magnitude of these losses depends on the number of firms,
the kind of oligopolistic behavior exhibited by them, and the elasticity of mar-
ket demand, among other factors. Research estimates of monopoly costs vary
from .5 to 6 percent of gross domestic product (GDP), depending on the
assumptions employed. Recent estimates have been predominantly in the lower
part of this range, below 2 percent of GDP.^1RENT SEEKING Because monopoly allows a firm to earn excess profits, com-
panies will invest resources in order to secure a monopoly position. This
includes activities directed at the political system (lobbying), the court system
(litigation), and the regulatory system (for example, at the Patent Office).
Economists call the excess profits that monopolists earn “rents” and call the
quest for these rents “rent seeking.” Economic theory suggests that firms will
compete for rents up to the point where it no longer profits them to do so.
That is, they will compete until most of the excess profits from monopoly have
been dissipated through the costs of rent-seeking activity. Rent-seeking activity
represents a social loss. (If everyone stopped doing it, social welfare would
increase, even if monopoly remained.)
If the monopolist dissipates its excess profits through rent-seeking activity,
the total welfare loss of monopoly includes not just the deadweight loss MDE
in Figure 9.3 but also the area MBCD. Interestingly, estimates of rent-seeking
losses (including resources spent by society to prevent rent-seeking) are typi-
cally higher (sometimes much higher) than the estimated deadweight losses
due to actual monopolization of markets.^2Government Responses
Antitrust action often is taken to prevent the emergence of monopoly power
and restore competition to a monopolistic industry. The U.S. Congress has
passed a number of important pieces of antitrust legislation to prevent and
attack monopolies. The Sherman Act of 1890 prohibits conspiracies and com-
binations in restraint of trade, monopolization of any kind, and attempts to
monopolize. The Clayton Act of 1914 identifies and prohibits specific types of
anticompetitive behavior. The act forbids types of price discrimination aimed
at reducing competition in an industry. (Recall that price discrimination occurs
when a producer sells the same type of goods to different buyers at different
prices.) It also prohibits tying agreements that are used for the purpose of(^1) For a survey and critique of these results, see A. J. Daskin, “Deadweight Loss in Oligopoly: A New
Approach,’’ Southern Economic Journal(July 1991): 171–185.
(^2) For a good discussion, see J. R. Hines, Jr., “Three Sides of Harberger Triangles,” Journal of Economic
Perspectives(Spring 1999): 167–188.
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