Economic Rent

The premium that you can get if you have an advantageous position in a less than PerfectlyCompetitive market. The obvious case is if you have a monopoly (you're the only seller) or a monopsony (you're the only buyer).

An oligopoly is, by definition, a situations where there are so few sellers that one seller's behavior can have a substantial affect on the price. (Likewise, an oligopsony is ... well, you figure it out.) For example, if Alice and Bob are the only sellers in a market (never mind why), Alice might raise her prices, and Bob might say, "If I keep my prices low and try to draw customers away from Alice, Alice will just bring her prices back down. If I raise my prices to match Alice's, I'll get more profits." So Bob hikes his prices, too, and both are collecting EconomicRent.

For example, suppose that in a market with an arbitrarily large number of butchers, hamburger costs $5/pound, and 1000 pounds of hamburger are sold every day; therefore, the butchers collectively make $5000/day from selling hamburger. Then (for whatever reason) one meat-packing company gets a monopoly on the hamburger market. The company raises the price of hamburger to $6/pound, and sells 900 pounds per day; it's lost customers, but it's increased its take to $5400/day. That extra $400 is EconomicRent. --SethGordon

It could also then only sell 700 pounds, in which case it is making less than the sum of its prior competitors. In this case, the monopoly thought that it could charge more to make more, but since the customers weren't willing to pay $6/pound, it ended up making less.--EvanCofsky

If it discovered that it only sold 700 pounds at $6, then it could just drop its price to the point at which it regained enough customers to maximize its profit. If it turned out that the profit-maximizing point was the same as the PerfectlyCompetitive price, then maybe (I don't know how a Real Economist would define the situation) there is no market for hamburger per se, since consumers have proven to be just as willing to switch from hamburger to other foods as they are to switch from one hamburger-dealer to another.

N.B.: One of the points of contention in Microsoft's antitrust trial is whether or not "operating systems for desktop computers with Intel-compatible CPUs" constitutes a "market" for purposes of antitrust law. --SethGordon

So a monopoly then would not be able to charge more than consumers are willing to pay. Neither could a company doing business in a more competitive market. So in either case, consumers pay what they want. What's the problem with monopolies? --EvanCofsky

Merely "not charging more than consumers are willing to pay" doesn't stop there being a problem. Kidnappers try not to charge more than their victims will pay, too; I expect they're often successful. That doesn't mean there's no problem with their activities. If a monopoly makes some good that's in great demand, then it can behave in a somewhat similar way.

This doesn't always happen: when the good in question is easily replaced with something else not under the control of the monopolist, raising prices sky-high won't work. That's why no one's worried if Mars has a monopoly on Mars Bars (a chocolate bar very popular in the UK), but they might be if Mars had a monopoly on chocolate.

--GarethMcCaughan

Yes, but Kidnapping is a form of theft. Being a monopoly in a market with customers who like your product or service is not theft. You have something you made (or purchased), and are willing to sell it. Your customers like what you have bought or produced, and are willing to buy it. The number of buyers and the number of sellers is irrelevant to the fairness of the situation. Whether either the buyers or the sellers are free to walk away from the transaction is.--EvanCofsky

The economic argument against monopolies is not about fairness. It's about efficiency. People freely engage in trade because each trade makes both sides better off, thus creating value (or economic utility) out of nothing. The total amount of value created is maximised when the two sides meet in the middle, with each of them getting some of the pie. It is an article of faith among economists that a free market will naturally tend to this optimum, and they have a number of theorems to support this position.

When one side has too much control over the terms of the deal, they tend to extort more value for themselves at the expense of the other side, thus reducing the total value created by the transaction. (The other party may still be better off trading than not, but they're worse off than they would be in a fair market - and they lose by more than the side with the power gains.) So it's better for society as a whole to prevent anyone from getting too much market power.

CategoryEconomics