By-Product Lobbying: Was Stigler Right?
U of Alabama Economics, Finance and Legal Studies Working Paper No. 07-8-01
26 Pages Posted: 13 Aug 2007
Date Written: August 2007
Olson (1965) argues that some large groups can overcome the free-rider problem 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. George Stigler (1974) 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. Pecorino (2001) showed that by-product firms can survive in a monopolistically competitive market structure if they use their profits to provide a pure public good. In this paper, I show that by-product lobbying will fail if the public good provided by the firm exhibits even a small degree of rivalry, and the group size is sufficiently large. This suggests that Stigler is right in the circumstances under which by-product lobbying is most relevant.
Keywords: By-Product Lobbying, Free-Rider Problem, Collective Action
JEL Classification: D7, H4
Suggested Citation: Suggested Citation