Can By-product Lobbying Firms Compete?

Abstract:     
Olson (1965) has argued that one way large groups overcome the free-rider problem is through by-product lobbying. The by-product firm sells a private good to potential members of the interest group and finances lobbying with its profits. It has been argued that by-product lobbying firms cannot survive competition with for-profit firms, since this would compete away monopoly rents, leaving the firm unable to lobby. In a model of monopolistic competition, I show that the by-product firm can enter the market, and earn enough profits to exceed the noncooperative level of lobbying. This is true despite the free entry of for-profit firms. A model of Bertrand competition is also analyzed. This paper provide strong theoretical support for the argument that by-product lobbying firms can successfully compete against for-profit firms.

Number of Pages in PDF File: 31

Keywords: By-product lobbying, free-rider problem, collective action

JEL Classification: D7, H4

working papers series