Getting straight on monopoly and rent: A dissent from Wellington and Gallo

Abstract

We should be grateful to Professor Wellington and Professor Gallo for directing our attention to a persisting and embarrassing ambiguity at the very center of microeconomics: the absence of any agreed-upon meanings for the key terms, economic rent, monopoly profit, monopoly rent, and welfare loss. I have, however, some reservations about the way that they have tried to resolve this ambiguity. I believe, though not with total certainty, that our differences involve more than terminology. My most serious reservation concerns their proposition that, when a monopolist owns resources that command economic rent, such "economic rent may decline with monopolization because the total of 'economic rent' rent must be less under monopolization than under competition". In the simplest of cases - one where no externalities are present - this cannot be true. Consider a Cournot model with n > 1 mineral springs and zero marginal costs of production. The total net revenue (income) obtainable from the operation of the set of mineral springs is maximized if, and only if, it is operated as a perfectly discriminating monopoly. (Let us note but pass over Paul Samuelson's jest that the perfectly discriminating monopolist is another name for God.) Any other arrangement - imperfectly discriminating monopoly, oligopoly, perfect or imperfect competition - reduces the total income (and hence the capitalized value) of the set of n mineral springs. In this simplest of cases, the introduction of competition (or, if the reader prefers, the introduction of a non-cooperative game) will increase output and welfare compared to a monopoly that does not practice perfect price discrimination. But such a substitution will not increase the total income obtainable by selling mineral water. Nor are these conclusions changed if we posit that the n mineral springs are individually owned but must sell through an agent - the monopolist - who has secured from the sovereign the exclusive right to market mineral water. Here we get a bargaining game. If the n producers were numerous and ill-organized before the monopolist took over marketing, then some part of their income may be appropriated by him. At