Monopoly Rents Research Articles

Valuation, Investment and the Pure Profit Share

This paper explores some implications for valuation and investment of challenging the standard assumption that there are no aggregate pure profits in the US economy. First, it highlights the theoretical importance of monopoly rents for fluctuations in average Q. A series for such rents is then computed by assuming that production is Cobb-Douglas, as fluctuations in the output share of pure profits may be inferred from variations in the labor share. Consequently, the paper focuses on the correlation between a measure of rents and observable average Q. It also reassesses the empirical disconnection between investment and a measure of marginal q purged of monopoly rents. The paper finds that the existence of pure profits as constructed from unit labor costs only accounts for about 5% of fluctuations in observed Q, and alters only minimally the empirical relationship between q and investment.

Valuation, Investment and the Pure Profit Share

This paper explores some implications for valuation and investment of challenging the standard assumption that there are no aggregate pure profits in the US economy. First, it highlights the theoretical importance of monopoly rents for fluctuations in average Q. A series for such rents is then computed by assuming that production is Cobb-Douglas, as fluctuations in the output share of pure profits may be inferred from variations in the labor share. Consequently, the paper focuses on the correlation between a measure of rents and observable average Q. It also reassesses the empirical disconnection between investment and a measure of marginal q purged of monopoly rents. The paper finds that the existence of pure profits as constructed from unit labor costs only accounts for about 5% of fluctuations in observed Q, and alters only minimally the empirical relationship between q and investment.

Integration and Independent Innovation on a Network

Physical telecom networks are costly and few, traditionally to the point of monopoly. Innovation thrives with many independent minds. So one might hope independent innovators, not only its proprietor M, can offer innovative services on a network, as has been true on the Internet. This issue is central in telecom policy; it also arises elsewhere, including complaints about Microsoft. I try to expound the following key points. Often an unregulated M has ex ante incentives to organize service innovation efficiently. But this incentive breaks down ex post as M can extract an independent J's quasi-rents (Farrell and Michael Katz 2000). Even ex ante, the one monopoly rent theorem (Ward Bowman 1957) fails when M's bottleneck access business is more regulated than its competitive services (e.g., Jean-Jacques Laffont and Jean Tirole 2000). This tempts M to sabotage J's innovations. Quarantining M from the service sector solves these problems, but excludes the firm with (often) the best opportunities and the strongest incentives to innovate. Parity pricing or ECPR (Robert Willig 1979) purports to get the best of both worlds (BoBW). But it seems so hard to implement in innovation markets that one might construe ECPR analysis as reductio ad absurdum for BoBW.

Beyond market power: Efficiency explanations for the basic structures of north American major league organizations

So far the “market power view” has been the dominant perspective of looking at the institutional setup of North American major leagues. As useful as the insights generated by this approach may be at the level of competition policy, they do not shed much light on the question of internal league organization. The reason is straightforward. A wide range of hybrid as well as all integrated structures of league organization provide an institutional infrastructure for crafting regulations aimed at the extraction of monopoly rents. A different perspective is needed in order to understand institutional choice within the range of structures, allowing for the potential abuse of market power. This paper shows that basic structures of major league organization can be explained as the result of a general attempt to increase internal efficiency in sports production. They contribute to the reduction of shirking in teams and to the protection of specific investments.

Aligning corporate strategy, procurement strategy and e‐procurement tools

This paper presents a framework for assessing alignment between corporate strategy, procurement strategy and purchasing tools. The framework is built on generation of rents as its common denominator for assessing alignment between the levels. Three types of rents are identified: monopoly rents; Ricardian rents and entrepreneurial rents. The framework is then used for assessing the strategic origin of the following e‐procurement applications: e‐sourcing, e‐tendering, e‐informing, e‐reversed auctions, e‐MRO, Web‐based enterprise resource planning and e‐collaboration. The results indicate that the e‐procurement tools are fully viable for creating monopoly rents, moderately viable for creating Ricardian rents and only somewhat viable for creating entrepreneurial rents. Therefore, it is necessary to first understand how the firm generates rents before procurement strategy and e‐procurement tools are implemented in order to avoid misalignment.

The potential for monopoly rents from Etosha National Park, Namibia

This paper reports on a survey carried out among visitors to Etosha, Namibia, in May 2002. We use the contingent valuation method to estimate foreign tourists willingness to pay for visiting the park. We find that the Namibian government could raise park fees substantially and increase profits from foreign tourists by approximately N$ 2,3 million per year. If fees were raised in collusion with other governments, in order to avoid competition between countries in the region, profits could presumably be increased even further. However, the survey used to collect data on tourists willingness to pay also indicated dissatisfaction with current management of in-park resorts, and improved management of these resorts would probably be crucial for the success of any new tariff scheme.

Competitive Competition Law? An Essay Against International Cooperation

This paper draws on strategic trade theory to explore the conditions under which different national competition law systems can compete. I assume that each state seeks to maximize a weighted sum of producer and consumer welfare within its territory, the weighting in turn reflecting public choice considerations. I further assume the tolerance or promotion of inefficient forms of inter-firm cooperation and monopolization discourages investment in the protected economic sector and makes it less likely that firms in that sector will innovate. Working within these assumptions, the question becomes whether states have sufficient incentives to discourage inefficient inter-firm cooperation and monopolization in cases where foreign consumers bear the lion's share of the costs of monopoly rents. In a static model, individual states should prefer such arrangements, resulting in a collective action problem due to global losses of welfare. If, however, protected economic sectors bear a sanction in the form of higher costs of capital and lower rates of innovation, the collective action problem may dissipate. The critical question thus becomes the strength of the assumption that private or state-sponsored protection reduces incentives for investment and innovation. Strategic trade theory also addresses the institutional conditions for governments to engage in successful protection. I argue that the tolerance of organizational combinations that reduce global welfare but produce local benefits is simply one aspect of such protection. The core common problem involves governmental capacity to distinguish industrial structures that advance efficiency from those that reflect rent-seeking. In trade law, one asks whether governments should protect local industries to promote positive externalities. In competition law, the symmetrical question is whether governments should sanction foreign industries to deter negative externalities. I conclude by considering governmental capacity to pick industrial winners and losers. The empirical case for governmental success at distinguishing efficiency-enhancing from rent-seeking industrial structures is mixed at best. Moreover, the instances where the distinction seems easiest to make - cartelization of primary products - more often involve greater governmental involvement in the promotion of inefficient industrial structures than in their dismantling. The implication of this evidence is that it is plausible to assume that protection resulting from competition policy, like protection produced by governmental intervention, does deter investment and innovation and thus contains its own punishment.

The Essential Facilities Doctrine: Keeping the Word 'Epithet' from Becoming One

The District of Columbia Circuit in 1977 coined the term to refer to a doctrine it traced 65 years of prior Supreme Court jurisprudence, and every federal circuit has recognized the essential facilities doctrine with similar elements. The United States Supreme Court, however, has never actually used the words in a holding. In 1989, concerned by what he perceived to be the potential overuse of the essential facilities Professor Phillip Areeda published his well-known article Essential Facilities: An Epithet in Need of Limiting Principles. As the name suggests, this article made a provocative point - that the essential facilities doctrine was in need of limiting principles, without which it would be overused and lead to mistaken and counterproductive results. The article explores how the growing academic criticism of the essential facilities doctrine has gone too far. By and large, the case law has dealt adequately with the facilities doctrine, and it throws the baby out with the bath water to forget the important core case that justified the doctrine in the first place. Worse still, thinking of Professor Areeda and his followers as solely critics of the essential facilities doctrine runs the especial risk of failing to enforce the antitrust laws where even the doctrine's critics agree antitrust enforcement makes sense - efforts by regulated monopolies (such as the telephone network) to exact monopoly rent by stifling competition in unregulated markets that depend on the monopoly's facility.

Integration and Independent Innovation on a Network

Physical telecom networks are costly and few, traditionally to the point of monopoly. Innovation thrives with many independent minds. So one might hope independent innovators, not only its proprietor M, can offer innovative services on a network, as has been true on the Internet. This issue is central in telecom policy; it also arises elsewhere, including complaints about Microsoft. I try to expound the following key points. Often an unregulated M has ex ante incentives to organize service innovation efficiently. But this incentive breaks down ex post as M can extract an independent J’s quasi-rents (Farrell and Michael Katz 2000). Even ex ante, the one monopoly rent theorem (Ward Bowman 1957) fails when M’s bottleneck access business is more regulated than its competitive services (e.g., Jean-Jacques Laffont and Jean Tirole 2000). This tempts M to sabotage J’s innovations. Quarantining M from the service sector solves these problems, but excludes the firm with (often) the best opportunities and the strongest incentives to innovate. Parity pricing or ECPR (Robert Willig 1979) purports to get the best of both worlds (BoBW). But it seems so hard to implement in innovation markets that one might construe ECPR analysis as reductio ad absurdum for BoBW.

The Geographic Scope of Retail Deposit Markets

In the United States, antitrust authorities rely heavily on numerical measures of local banking market concentration such as the Herfindahl Hirschmann Index to assess the likely competitive effects of proposed bank mergers and acquisitions. This approach to antitrust enforcement relies on two important assumptions: (1) that markets for at least some types of banking products are local in scope, and (2) that market concentration measures can serve as effective proxies for banks' abilities to extract monopoly rents. This paper uses balance sheet data from most banks operating in the United States in 1988, 1992, 1996, and 1999 to test these assumptions.

Rent-seeking in a unionised monopoly

A unionised monopoly firm, benefitting from some kind of anti-competitive regulation, and its corresponding trade union have a common interest in spending resources to protect the monopoly rents created by the regulation. In the present paper, a situation in which the unionised monopoly is challenged by a consumer organisation fighting for deregulation is analysed as a standard Tullock rent-seeking contest. With unequal sharing of monopoly rents, the free-riding incentives among the rent-defending players turn out to be overwhelming, in the sense that the unique Nash equilibrium is characterised by zero effort contribution by the player with the lower valuation of the contested prize. This implies that being “strong”, in terms of bargaining strength, is not necessarily an advantage for neither player in a unionised monopoly that is threatened by deregulation.

Obstacles to privatisation of state‐owned industries in Algeria: the political economy of a distributive conflict

This analysis seeks to explain why privatisation of state‐owned industrial enterprises in Algeria ‐ a process pushed by the IMF and the World Bank and launched in 1994 ‐has not led to a single complete divestiture of shares of corporatised public enterprises by 2001. Privatisation of these enterprises has been impeded by (1) intra‐elite struggles and violent conflicts between state elites and armed groups over the distribution of rents, rendering decision making and coherent reform strategies impossible; (2) military and bureaucratic elite clans that profit from import monopoly and oligopoly rents and display little interest in increased domestic production; (3) the role of industrial enterprises in (clientelist) social networks; (4) the strong remnants of a nationalist, étatist, socialist and collectivist ideology.

The Geographic Scope of Retail Deposit Markets

In the United States, antitrust authorities rely heavily on numerical measures of local banking market concentration such as the Herfindahl Hirschmann Index to assess the likely competitive effects of proposed bank mergers and acquisitions. This approach to antitrust enforcement relies on two important assumptions: (1) that markets for at least some types of banking products are local in scope, and (2) that market concentration measures can serve as effective proxies for banks' abilities to extract monopoly rents. This paper uses balance sheet data from most banks operating in the United States in 1988, 1992, 1996, and 1999 to test these assumptions.

The Invisible Hand of Democracy

Despite considerable normative support, analysts have failed to identify any systematic effects of democracy on domestic policy outputs. Building on a theory of the state as a monopoly producer of public services and establishing a common foundation for studying variations in regimes and their policy consequences, the authors hypothesize that democratic states will earn fewer monopoly rents and produce a higher level of services than autocracies. They test this hypothesis both cross-sectionally and over time for a variety of public health and education indicators. The statistical results strongly support their hypotheses. The authors conclude that democracy has real, substantively important effects on the daily lives and well-being of individuals around the globe.

Rents and Their Corporate Consequences

Product markets are weaker in some nations than they are in others. Weaker product markets, and the concomitant monopoly rents, can affect corporate govemance. They can do so directly by loosening a constraint on managers, thereby increasing managerial agency costs to shareholders-costs that shareholders would then seek to reduce otherwise. The monopoly profits can also affect corporate governance structures indirectly by setting up a fertile field for conflict inside the firm as the corporate players-shareholders, managers, and employees-seek to grab those monopoly profits for themselves. One would expect corporate governance structures, laws, and practices in nations with monopoly-induced high agency costs to differ from those prevailing in nations with more competition, fewer monopolies, and lower agency costs. And we might speculate that these rents when large and widespread could affect democratic politics and law-making: directly by making monopolists political targets (and politicalforces); and indirectly as the players inside the firm seek to capture those monopoly profits through political action, with political parties and ideologies (and, in time, laws and standards) that parallel the players' places inside the firm. Data from the industrial organization, finance economics, and political science literature is consistent.

Ideology, Human Capital, and Growth

We develop an endogenous growth model in which technological progress raises the e±ciency of time allocated to education, and knowledge and ideology play complementary roles in determining individuals' e±ciency units of labor input. A higher supply of aggregate units of e±ciency labor generates incentives to invent new technologies because it raises the monopoly rents from the introduction of such technologies. We show that economies with initally more \fact-consistent ideologies are likely to invest more in education and as a result experience faster technological progress and growth. Somewhat paradoxically, we also demonstrate that relatively more fact-consistent ideologies are the ones likely to experience weakening support. Adherence to °exible ideologies that evolve over time remains high even in the long run. When there exists a feedback loop between education and ideology, a °awed ideology may be better for growth and development than no ideology. Finally, the frequency with which ideologies are adopted and spread may be decreasing in the sophistication of technology.

Firm-Specific Human Capital as a Shared Investment: Comment

Employment relationships typically involve the division of surplus. Surplus can be the result of a good match, a monopoly rent, or a quasirent that arises because of a specific investment. The division of this surplus is of economic interest as it is a determinant of turnover, investment, and wages. Gary S. Becker (1962) argued, in the context of specific human-capital investments, that the incumbent employee and firm will share the surplus. This notion was formalized in a prototypical model of surplus sharing as first proposed by Masanori Hashimoto (1981). The model has been studied extensively, among others by H. Lorne Carmichael (1983), Robert E. Hall and Edward P. Lazear (1984), and Donald O. Parsons (1986), while Elizabeth Becker and Cotton M. Lindsay (1994) provide an empirical application. The key feature of the model is the existence of transaction costs. Both the employee and the firm have (ex ante uncertain) private information on which they cannot write a contingent contract. This makes that they write a nonrenegotiable contract that specifies a fixed wage. After this, the firm learns the value of the employee’s marginal product whereas the employee learns the value of his outside option. Both parties then decide unilaterally whether to separate or not and inefficient separations may occur. The wage is set in such a way as to maximize the expected total surplus. The present analysis will consider the role of uncertainty in this model. This has not been done before in a rigorous way. Hashimoto considered only degenerate cases. His analysis suggests that the wage will be low when the uncertainty of the market conditions is small, and high when the uncertainty of the conditions inside the firm is small. Parsons (1986) makes a claim that this is actually the case without deriving the result. This paper shows that the comparative statics are ambiguous and may well be the opposite of those suggested by Hashimoto and claimed by Parsons. It also provides the intuition that is behind this result, namely that uncertainty not only influences turnover but also the option value of the match and its opportunity cost. Section I, briefly summarizes Hashimoto’s model and shows that without further assumptions the comparative statics are ambiguous. Section II derives an explicit solution of the wage. Section III briefly considers alternative wage-setting schemes and Section IV concludes.

Firms' R&D decisions under incomplete information

The paper considers a patent race in which firms do not know their relative positions. In this setting, firms that start in the same position proceed at the highest possible speed; and if one firm has an initial advantage it preempts the rival, but at the cost of dissipating a significant part of its monopoly rent. So the paper shows that incomplete information in a patent race leads to rent dissipation. The latter is higher, the higher the value of the prize and the lower the cost of R&D. Thus, for innovations that provide relatively high profits the time to discovery is shortened, but the social losses are likely to be high, due to duplication of effort.

Quantitative Trade Restrictions in Unionized Economies

This paper models the interactions of a labor union and a monopoly firm under an import quota in a small open economy. The distorted equilibrium is depicted in a diagram, in which wages and employment in both sectors, and the monopoly rent, can be identified. The imposition of an import quota in the unionized sector reduces monopoly rent, union employment, and wages in both sectors, compared with the case of autarky. In addition, the paper presents several surprising comparative statics results. For instance, an increase in the world price causes the protected (i.e., “wrong”) sector to shrink, wages to decrease, and national income to rise if the initial world price is low.

How to win the political contest: A monopolist vs. environmentalists

This paper sheds light on the political economy of local energypolitics both from a theoretical and an empirical perspective.First, a case study of a small town in Southern Germany(Schonau) is presented, where environmentalists have won thepolitical contest against the regional energy monopolist and havefounded an energy supply firm themselves. The different stagesof the political process are explained and analysed. Second, apolitical economy model is developed, where environmentalists anda monopolistic utility firm confront each other both on thepolitical and on the energy market. In the lobbying equilibriumthe probability of the environmentalists' winning the gamedepends on the monopoly rent and the perceived social costs ofenergy production. It is shown that it is optimal for themonopolist to reduce his output below the monopolistic output.Finally, the winning strategy in the Schonau case is discussedin the light of the theoretical results of the paper.