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The Social Costs of Monopoly and Regulation: Some Comments

Richard Posner (1975) has recently presented an interesting alternative to existing estimates of the social costs of monopoly and regulation. His estimates are based on the notion that potential monopolists will be willing to expend up to the expected rents from a monopoly to obtain the monopoly so that under perfect competition these expected rents will be converted into social costs. However, when it is profitable to establish a cartel, it will also be in the common interest of the members of the cartel to protect against violations of the cartel's rules as well as against threats from outsiders, and these protection costs are likely to affect the cartel's optimal price and quantity and thus its profits.' In this note, I extend Posner's analysis to show that the existence of such protection costs can cause either a higher or lower price (than the simple monopoly price) to be optimal for the cartel.