[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

deliberately try to inhibit innovative activities of potential rivals, they may stifle
progress indirectly. Some of the most important inputs into the innovation process
are prior innovations themselves, and by raising the “price” associated with these
earlier discoveries (through their market power), monopolists reduce the incentives
for follow-up inventions.
RENT SEEKING
The final source of economic inefficiency under monopoly is the temptation for
monopolists to expend resources in economically unproductive ways. In particular,
they may seek to deter the entry of other firms into their market. Because the profits
a monopolist receives are called monopoly rents, the attempt to acquire or maintain
already-existing rents by acquiring or maintaining a monopoly position in some
industry is referred to as rent seeking.
Sometimes a firm’s monopoly position is at least partly the result of government
protection. Many less-developed countries grant a company within their country a
monopoly to produce a good, and they bar imports of that good from abroad. In these
circumstances, firms will give money to lobbyists and politicians to maintain regulations
that restrict competition so that they can keep their profits high. Such activities
are socially wasteful. Real resources (including labor time) are used towin favorable
rules, not to produce goods and services. There is thus legitimate concern that the willingness
of governments to restrict competition will encourage firms to spend money
on rent-seeking activities rather than on making a better product.
To gain and hold a monopoly position, the firm would be willing to spend up to
the amount it would receive as monopoly profits. The waste from this rent-seeking
activity can be much larger than the loss from reduced output.
FURTHER DRAWBACKS OF LIMITED
COMPETITION
We saw in Chapter 12 that markets in which a few firms dominated were more
common than monopolies, and some of the inefficiencies discussed above are smaller
under limited competition. Output is lower than under perfect competition but
higher than under monopoly, for example. And competition to produce new products
(research and development) is often intense, as we will see in Chapter 20. But other
inefficiencies are worse in markets with limited competition than in monopoly markets.
Firms under imperfect competition, for example, devote much attention to
practices designed to deter entry, to reduce the force of competition, and to raise
prices. Their expenditures may increase profits but they waste resources and make
consumers worse off. Under imperfect competition firms may, for instance, maintain
excess capacity to deter entry. A firm may gain a competitive advantage over
its rival not by lowering its own costs but by raising the rival’s—for instance, by
denying it the use of existing distribution facilities. A firm may also spend money
on uninformative (but persuasive) advertising.
292 ∂ CHAPTER 13 GOVERNMENT POLICIES TOWARD COMPETITION