Chapter 10—Monopoly and Competition (continued)
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Chapter 10—Monopoly and
Competition (continued)
C.
Consequences of Monopoly-Price Theory
(1) The Competitive Environment
Before engaging in a critical analysis of the monopoly-price theory
itself, we might explore some of the consequences which do or do not
follow from it. In this section we for the moment assume that the
monopoly-price theory is valid.
In the first place, it is
not true that the “monopolist” (used here in the
sense of definition 3—an obtainer of a monopoly
price) is removed from the influence of competition or has
the power to dictate to consumers at will. The best of the
monopoly-price theorists admit that the monopolist is as subject to the
forces of competition as are other firms. The monopolist cannot set
prices as high as he would like, being limited by the configurations of
consumer demand. By definition, in fact, the demand curve as
presented to the monopolist becomes elastic above the
monopoly-price point. There has been an unfortunate tendency
of writers to refer to an “elastic demand curve” or
an “inelastic demand curve” without pointing out
that every curve has different ranges along which
there will be varying degrees of elasticity or inelasticity. By
definition, the monopoly-price point is that which maximizes the
firm’s or the cartel’s income; above that price any
further “restriction” of production and sales will
lower the monopolist’s monetary income. This implies that the
demand curve will become elastic above that point,
just as it is also elastic above the competitive-price
point when that is established on the market. Consumers make
the curve elastic by their power of substituting purchases of
other goods. Many other goods compete
“directly” in their use-value to the
consumer. If some firm or combination of firms should, for
example, achieve a monopoly-price for cake soap, housewives can shift
to detergents and thus limit the height of the monopoly price. But, in
addition, all goods,
without exception, compete for the consumer’s dollar or gold
ounce. If the price of yachts becomes too high, the consumer can
substitute expenditure on mansions, or he can substitute books for
television sets, etc.
Furthermore, as the market advances, as capital is invested and the
market becomes more and more specialized, the demand curve for each
product tends to become more and more elastic. As
the market develops, the range of consumers’ goods available
increases enormously. The more consumers’ goods are
available, the more goods can be purchased by consumers, and the more
elastic, ceteris paribus, the demand curve for each
good will tend to be. As a result, the opportunities for the
establishment of monopoly prices will tend to diminish as the market
and “capitalist” methods develop.
(2) Monopoly Profit versus
Monopoly Gain to a Factor
Many monopoly-price theorists have declared that establishment
of the monopoly price means that the monopolist is able to attain
permanent “monopoly profits.” This is then
contrasted with “competitive” profits and losses,
which, as we have seen, disappear in the evenly rotating economy. Under
“competition,” if one firm is seen to be making
great profits in a particular productive process, other firms
rush in to take advantage of the anticipated opportunities,
and the profits disappear. But in the case of the monopolist, it is
asserted, his unique position allows him to keep making these profits
permanently.
To use such terminology is to misconceive the nature of
“profit” and “loss.” Profits
and losses are purely the results of entrepreneurial activity, and that
activity is the consequence of the uncertainty of the future.
Entrepreneurship is the action on the market that takes advantage of
estimated discrepancies between selling prices and buying
prices of factors. The better forecasters make profits, and
the incorrect ones suffer losses. In the evenly rotating economy, where
everyone has settled down to an unchanging round of activity, there can
be no profit or loss because there is no uncertainty on the
market. The same is true for the monopolist. In the evenly rotating
economy, he obtains his “specific monopoly gain,” not
as an entrepreneur, but as the owner of the product which he sells. His
monopoly gain is an added income to his monopolized
product; whether for an individual or for a cartel, it is this
product which earns more income through restriction of its supply.
The question arises: Why cannot other entrepreneurs seize the gainful
opportunity and enter into the production of this good, thereby tending
to eliminate the opportunity? In the case of the cartel, this is
precisely the tendency that will always prevail and lead to the breakup
of a monopoly-price position. Even if new firms entering the industry
are “bought off” by being offered quotal positions
in the old cartel, and both the new and the old firms have been able to
agree on allocations of production and income, such actions will not
suffice to preserve the cartel. For new firms will be tempted to
acquire a share in the monopoly gains, and ever more will be created
until the entire cartel operation is rendered unprofitable,
there being too many firms to share the benefits. In such situations,
the pressure will become greater and greater for the more efficient
firms to cut loose from the cartel and to refuse further to provide a
comfortable shelter for the host of inefficient firms.
In the case of a single monopolist, either his brand name and unique
goodwill with the consumers prevents others from taking away
his monopoly gains, or else he is a recipient of special monopoly
privilege from the government, in which case other producers are
prevented by force from producing the same good.
Our analysis of monopoly gain must be pursued further. We have said
that the gain is derived from income from the sale of a certain
product. But this product must be produced by factors,
and we have seen that the return to any product is resolved into
returns to the factors which produce it. Such
“imputation,” in the market, must also take place
for monopoly gains. Let us say, for example, that the Staunton Washing
Machine Company has been able to achieve a monopoly price for its
product. It is clear that the monopoly gain cannot be attributed to the
machines, the plant, etc., which produce the washers. If the Staunton
Company bought these machines from other producers, then any monopoly
gains would, in the long run, as the machines were replaced, accrue to
the producers of the machines. In the evenly rotating economy, where
entrepreneurial profits and losses disappear, and the price of a
product equals the sum of the prices of its factors, all the monopoly
gain would accrue to a factor and not a product.
Furthermore, no income, except time income, could
accrue to the owner of a capital good, because every capital good must,
in turn, be produced by higher-order factors. Ultimately, all capital
goods are resolvable into labor, land, and time
factors. But if the Staunton Washing Machine Company cannot itself
achieve a monopoly gain from a monopoly price, then obviously it does
not benefit by restricting production in order to obtain this gain.
Therefore, just as no income in the evenly rotating
economy can accrue specifically to owners of capital goods,
neither can specific monopoly gains.
The monopoly gains must, then, be imputed to either labor or land
factors. In the case of a brand name, for example,
a certain kind of labor factor is being
monopolized. A name, as we have seen, is a unique identifying label for
a person (or a group of persons acting co-operatively), and is
therefore an attribute of the person and his
energy. Considered generally, labor is the term
designating the productive efforts of personal energy,
whatever its concrete content. A brand name, therefore, is
an attribute of a labor factor, specifically the owner or
owners of the firm. Or, considered catallactically,
the brand name represents the decision-making rent
accruing to the owner and his name. If a monopoly price is achieved by
the baseball prowess of Mickey Mantle, this is a specific monopoly gain
attributable to a labor factor. In both of these cases, then, the
monopoly price stems, not simply from the unique possession of the
final product, but, more basically, from the unique
possession of one of the factors necessary to the final
product.
A monopoly gain might also be imputable to ownership of a unique
natural resource or “land” factor. Thus, a monopoly
price for diamonds may be attributable to a monopoly of
diamond mines, from which diamonds must be ultimately produced.
Under the analysis of monopoly price, then, there cannot be, in the
evenly rotating system, any such thing as “monopoly
profits”; there are only specific monopoly income gains to
owners of labor or land factors. No monopoly gain can accrue to an
owner of a capital good. If a monopoly price has been imposed because
of a grant of monopoly privilege by the State, then obviously
the monopoly gain is attributable to this special privilege.
(3) A
World of Monopoly Prices?
Is it possible, within the framework of monopoly-price theory,
to assert that all prices on the free market may be
monopoly prices?
Can all
selling prices be monopoly prices?
There are two ways in which we may analyze this problem. One is by
turning our attention to the monopolized industry. As we have seen, the
industry with a monopoly price restricts production in that
industry (either by a cartel or a single firm), thereby releasing
nonspecific factors to enter other fields of production. But
it is evidently impossible to conceive of a world of monopoly prices,
because this would imply a piling up of unused nonspecific factors.
Since wants do not remain unfulfilled, labor and other nonspecific
factors will be used somewhere, and the industries that acquire more
factors and produce more cannot be monopoly-price industries. Their
prices will be below the competitive price
level.
We may also consider consumer demand. We have seen that a necessary
condition for the establishment of monopoly price is a
consumers’ demand schedule inelastic above the
competitive-price point. Obviously, it is impossible for every
industry to have such an inelastic demand schedule. For the definition
of inelastic is that consumers will spend a greater
total sum of money on the good when the price is higher. But consumers
have a certain given total stock of money assets and money income, as
well as a given amount, at any one time, which they may allocate to
consumption spending. If they spend more on a certain good, they have
less to spend on other goods. Therefore, they cannot spend more on every
good, and not all prices can be monopoly prices.
There can never, then, be a world of monopoly prices, even assuming
monopoly-price theory. Because of the fixity of
consumers’ monetary stock and the employment of
displaced factors, monopoly prices could not be established in more
than approximately half of the economy’s industries.
(4) “Cutthroat” Competition
A popular theme in the literature is the alleged evil of
“cutthroat competition.” Curiously,
cutthroat, or “excessive,” competition, is
linked by critics to the achievement of a monopoly price. The usual
charge is that a “big” firm, for example,
deliberately sells below the most profitable price, even to the extent
of suffering losses. The firm acts so peculiarly in order to
force another firm producing the same product to cut its price
also. The “stronger” firm, with the capital
resources to endure the losses, then drives the
“weaker” firm out of business and establishes a
monopoly of the field.
But, first, what is wrong with such a monopoly (definition 1)? What is
wrong with the fact that the firm more efficient in serving
the consumer remains in business, while consumers refuse to patronize
the inefficient firm? A firm’s suffering losses signifies
that it is not as successful as other firms in serving consumer
desires. Factors then shift from the inefficient to the
efficient firms. A firm’s going out of business harms no
owner of any factor it employs and injures only the entrepreneur who
miscalculated in his advance-production decisions. A firm goes out of
business precisely because it suffers entrepreneurial losses,
i.e., its monetary revenues in sales to consumers are less than the
money it paid out previously to owners of factors. But so much money
had to be paid out for factors, i.e., costs were so high, because these
factors could earn as much money elsewhere. If this
entrepreneur cannot profitably employ the factors at their given
prices, the reason is that factor-owners can sell their services to
other firms. In so far as factors may be specific to the firm, and to
the extent that their owners will accept a reduced price and income as
the price of the firm’s product is reduced, total money costs
can be reduced and the firm can be maintained in operation. Therefore,
failure by business firms is due solely to entrepreneurial error in
forecasting and to entrepreneurial inability to secure the factors of
production by outbidding those firms more successful in
serving the consumer.
Thus, the elimination of
inefficient firms cannot harm factor-owners or lead to their
“unemployment,” since their failure was due
precisely to the more attractive competing bids made by other firms
(or, in some cases, to the alternatives of leisure or production
outside the market). Their failure also helps consumers by transferring
resources from wasteful to efficient producers. It is largely
the entrepreneurs who suffer from their own errors, errors incurred
through their own voluntarily adopted risks.
It is curious that the critics of “cutthroat
competition” are generally the same as those who complain
about the market’s subversion of
“consumers’ sovereignty.” For selling a
product at very low prices, even at short-term losses, is a bonanza to
the consumers, and there is no reason why this gift to the consumers
should be deplored. Furthermore, if the consumers were really indignant
about this form of competition, they would scornfully refuse to accept
this gift and instead continue to patronize the allegedly
“victimized” competitor. When they do not do so and
instead rush to acquire the bargains, they are indicating their perfect
contentment with this state of affairs. From the point of view of
consumers’ sovereignty or individual sovereignty, there is
nothing at all wrong with “cutthroat competition.”
The only conceivable problem is the one usually cited: that after the
single firm has driven everyone else out of business through sustained
selling at very low prices, then the final
monopolist will restrict sales and raise its price to a monopoly price.
Even granting for a moment the tenability of the monopoly-price
concept, this does not seem a very likely occurrence. In the first
place, it is time enough to complain after the
monopoly price is established, especially since we have seen that we
cannot consider “monopoly” per se
(definition 1) as an evil.Secondly, a firm will not always
be able to achieve a monopoly price. In all such cases, including (a)
where not all the other firms in the industry can be driven
out, or (b) where the demand curve is such that the
monopolist cannot achieve a monopoly price, the
“cutthroat competition” is then a pure
boon with no harmful effects.
Incidentally, it is by no means true that the large
firms will always be the strongest in a “price-cutting
war.” Often, depending on the concrete conditions,
it is the smaller, more mobile firm, not burdened with heavy
investments, that is able to “cut its costs”
(particularly when its factors are more specific to it, such as the
labor of its management) and outcompete the larger firm. In such cases,
of course, there is no monopoly-price problem whatever. The
fact that the lowly pushcart peddler for centuries has been
set upon by governmental violence at the behest of his more lordly and
heavily capitalized competitors bears witness to the practical
possibilities of such a situation.
Suppose, however, that after this lengthy and costly process, a firm
has finally been able to achieve a monopoly price by the route of
“cutthroat competition.” What is there to prevent
this monopoly gain from attracting other entrepreneurs who will try to
undercut the existing firm and achieve some of the gain for themselves?
What is to prevent new firms from coming in and driving the price down
to competitive levels again? Is the firm to resume “cutthroat
competition” and the same deliberate losing process
once more? In that case, we are likely to find that consumers of the
good will be receiving gifts far more often than facing a monopoly
price.
Professor Leeman has pointed out
that the smaller firm,
driven out by “cutthroat competition,” may simply
close down, wait for the larger firm to reap its expected gain of a
higher “monopoly price,” and then reopen! More
important, even if the small firm is driven into bankruptcy, its physical
plant remains intact, and it may be bought by a new
entrepreneur at bargain prices. As a result, the new firm will be able
to produce at very low cost and damage the “victor”
firm considerably. To avoid this threat, the big firm would have to
delay raising its price for the very long time required for the small
plant to wear out or become obsolete.
Leeman also demonstrates that the big firm could not keep new, small
firms out by a mere threat of cutthroat
competition. For (a) new firms will probably
interpret the high price charged by the
“monopolist” as a sign of inefficiency, providing a
ripe opportunity for profits; and (b) the
“monopolist” can demonstrate his power
satisfactorily only by actually selling at low
prices for long periods of time. Hence, only by keeping its costs down
and its prices low, i.e., by not extracting a
monopoly price, can the “victor” firm keep out
potential rivals. But this means that the cutthroat competition, far
from being a route to a monopoly price, was a pure gift to consumers
and a pure loss to the “victor.”
But what of a standard problem brought forward by critics of cutthroat
competition”? Cannot the big firm check the entry of
efficient small firms by simply buying up the new rival’s
plant and putting it out of production? Perhaps a short period of
cutthroat price-cutting will convince the new small firm of
the advantage of selling out and will permit the monopolist to
avoid the long periods of losses just mentioned.
No one seems to realize, however, the high costs such buying will
entail. Leeman points out that the really efficient small firm can
demand such a high price for its assets as to make the whole procedure
prohibitively expensive. And, further, any later attempt by
the large firm to recoup its losses by charging the monopoly
price will only invite new entry by other firms and redouble
the expensive buying-out process again and again. Buying out
competitors, then, will be even more costly than simple cutthroat
competition, which we have seen to be unprofitable.
A final argument against the doctrines of “cutthroat
competition” is that it is impossible to
determine whether it is taking place or not. The fact that a
monopoly might ensue afterward does not even establish the motive and
is certainly no criterion of cutthroat procedures.
One proposed criterion has been selling “below
costs”—most cogently, below what is usually termed
“variable costs,” the expenses of using
factors in production, assuming previously sunk investment in
a fixed plant. But this is no criterion at all. As we have already
declared, there is no such thing as costs (apart
from speculation on a higher future price) once the stock has
been produced. Costs take place along the path of decisions
to produce—at each step along the way that
investments (of money and effort) are made in factors. The
allocations, the opportunities forgone, take place at each step as
future production decisions must be taken and commitments
made. Once the stock has been produced, however (and there is no
expectation of a price rise), the sale is costless,
since there are no advantages forgone by selling the product
(costs in making the sale being here considered negligible for purposes
of simplification). Therefore, the stock will tend to be sold at
whatever price is obtainable. There is no such thing, then, as
“selling below costs” on stock already produced.
The cutting of price may just as well be due to inability to dispose of
stock at any higher price as to “cutthroat”
competition, and it is impossible for an observer to separate the two
elements.
D.
The Illusion of Monopoly Price on the Unhampered Market
Up to this point we have explained the neoclassical theory of monopoly
price and have pointed out various misconceptions about its
consequences. We have also shown that there is nothing bad about
monopoly price and that it constitutes no infringement on any
legitimate interpretation of individuals’ sovereignty or even
of consumers’ sovereignty. Yet there has been a great
deficiency in the economic literature on this whole issue: a
failure to realize the illusion in the entire
concept of monopoly price.
If we turn to the
definition of monopoly price on page 672 above, or the diagrammatic
interpretation in Figure 67, we find that there is assumed to
be a “competitive price,” to which a
higher “monopoly price”—an outcome of
restrictive action—is contrasted. Yet, if we analyze the
matter closely, it becomes evident that the entire contrast is
an illusion. In the market, there is no discernible,
identifiable competitive price, and therefore there is no way
of distinguishing, even conceptually, any given price as a
“monopoly price.” The alleged
“competitive price” can be identified neither by
the producer himself nor by the disinterested observer.
Let us take a firm which is considering the production of a certain
good. The firm can be a “monopolist” in the sense
of producing a unique good, or it can be an
“oligopolist” among a few firms. Whatever its
position, it is irrelevant, because we are interested only in whether
or not it can achieve a monopoly price as compared to a competitive
price. This, in turn, depends on the elasticity of the demand curve as
it is presented to the firm over a certain range.
Let us say that the firm finds itself with a certain demand curve
(Figure 68).
The producer must decide how much of the good to produce and sell in a
future period, i.e., at the time when this demand curve will become
relevant. He will set his output at whatever point is expected to
maximize his monetary earnings (other psychic factors being equal),
taking into consideration the necessary monetary expenses of
production for each quantity, i.e., the amounts that can be produced
for each amount of money invested. As an entrepreneur he will
attempt to maximize profits, as a labor-owner to maximize his monetary
income, as a landowner to maximize his monetary income from
that factor.
On the basis of this logic of action, the producer sets his
investment to produce a certain stock, or as a factor-owner to
sell a certain amount of service, say 0S. Assuming
that he has correctly estimated his demand curve, the
intersection of the two will establish the market-equilibrium price, 0P
or SA.
The critical question is this: Is the market price, 0P,
a “competitive price” or a
“monopoly price”? The answer is that there
is no way of knowing. Contrary to the assumptions of the
theory, there is no “competitive price” which is
clearly established somewhere, and which we may compare 0P
with. Neither does the elasticity of the demand curve establish any
criterion. Even if all the difficulties of discovering and identifying
the demand curve were waived (and this identifying can be done, of
course, only by the producer himself—and only in a tentative
fashion), we have seen that the price, if accurately estimated, will
always be set by the seller so that the range above the
market price will be elastic. How is anyone, including the
producer himself, to know whether or not this market price is
competitive or monopoly?
Suppose that, after having produced 0S, the
producer decides that he will make more money if he produces less of
the good in the next period. Is the higher price to be gained from such
a cutback necessarily a “monopoly price”? Why could
it not just as well be a movement from a subcompetitive
price to a competitive price? In the real world, a demand
curve is not simply “given” to a producer, but must
be estimated and discovered. If a producer has produced too much in one
period and, in order to earn more income, produces less in the next
period, this is all that can be said about the action.
For there is no criterion that will determine whether or not he is
moving from a price below the alleged
“competitive price” or moving above
this price. Thus, we cannot use “restriction of
production” as the test of monopoly vs. competitive price. A
movement from a subcompetitive to a competitive price also involves a
“restriction” of production of this good, coupled,
of course, with an expansion of production in other lines by the
released factors. There is no way whatever to distinguish
such a “restriction” and corollary expansion from
the alleged “monopoly-price” situation.
If the “restriction” is accompanied by increased
leisure for the owner of a labor factor rather than increased
production of some other good on the market, it is still an expansion
of the yield of a consumers’ good—leisure. There is
still no way of determining whether the
“restriction” resulted in a
“monopoly” or a
“competitive” price or to what extent the
motive of increased leisure was involved.
To
define a monopoly price as a price attained by
selling a smaller quantity of a product at a higher price is therefore
meaningless, since the same definition applies to the
“competitive price” as compared with a
subcompetitive price. There is no way to define “monopoly
price” because there is also no way of defining the
“competitive price” to which the former must refer.
Many writers have attempted to establish some criterion for
distinguishing a monopoly price from a competitive price. Some call the
monopoly price that price achieving permanent, long-run
“monopoly profits” for a firm. This is contrasted
to the “competitive price,” at which, in
the evenly rotating economy, profits disappear. Yet, as we
have already seen, there are never permanent monopoly profits, but only
monopoly gains to owners of land or labor factors. Money costs to the
entrepreneur, who must buy factors of production, will tend to equal
money revenues in the evenly rotating economy, whether the price is
competitive or monopoly. The monopoly gains, however, are secured as income
to labor or land factors. There is therefore never any
identifiable element that could provide a criterion of the absence of
monopoly gain. With a monopoly gain, the factor’s
income is greater; without it, it is less. But where is the
criterion for distinguishing this from a change in the income of a
factor for “legitimate” demand and supply reasons?
How to distinguish a “monopoly gain” from a simple
increase in factor income?
Another theory attempts to define a monopoly gain as income to a factor
greater than that received by another, similar factor. Thus, if Mickey
Mantle receives a greater monetary income than another outfielder, that
difference represents the “monopoly gain” resulting
from his natural monopoly of unique ability. The crucial
difficulty with this approach is that it implicitly adopts the old
classical fallacy of treating all the various labor factors, as well as
all the various land factors, as somehow homogeneous. If all the labor
factors are somehow one good, then the variations
in income accruing to each must be explained by reference to some sort
of “monopolistic” or other mysterious element. Yet
a good with a homogeneous supply is only a good if
all its units are interchangeable, as we saw at the beginning of this
work. But the very fact that Mantle and the other outfielder are
treated differently in the market signifies that they are selling different,
not the same, goods. Just as in tangible commodities, so in
personal labor services (whether sold to other producers or to
consumers directly): each seller may be selling a unique good,
and yet he is “competing” with more or less close
substitutability against all the other sellers for the purchases of
consumers (or lower-order producers). But since each good or service is
unique, we cannot state that the difference between the prices of any
two represents any sort of “monopoly price”;
monopoly price vis-à-vis competitive price can refer only to
alternative prices of the same good. Mickey Mantle
may indeed be a person of unique ability and a
“monopolist” (as is everyone else)
over the disposition of his own talents, but whether or not he is
achieving a “monopoly price” (and therefore a
monopoly gain) from his service can never be determined.
This analysis is equally applicable to land. It is just as
illegitimate to dub the difference between the income of the
site of the Empire State Building and that of a rural general store a
“monopoly gain” as to apply the same
concept to the additional income of Mickey Mantle. The fact that both
areas are land makes them no more homogeneous on the market than the
fact that Mickey Mantle and Joe Doakes are both baseball players or, in
a broader category, both laborers. The fact that each is remunerated at
a different price and income signifies that they are considered
different on the market. To treat differential gains for different
goods as instances of “monopoly gain” is to render
the term completely devoid of significance.
Neither is the attempt to establish the existence of idle
resources as a criterion of monopolistic
“withholding” of factors any more valid. Idle labor
resources will always mean increased leisure, and therefore the leisure
motive will always be intertwined with any alleged
“monopolistic” motive. It therefore
becomes impossible to separate them. The existence of idle
land may always be due to the fact of the relative scarcity of labor as
compared with available land. This relative scarcity makes it more
serviceable to consumers, and hence more remunerative, to invest labor
in certain areas of land, and not in others. The land areas least
productive of potential earnings will be forced to lie idle, the amount
depending on how much labor supply is available. We must stress that
all “land” (i.e., every nature-given resource) is
involved here, including urban sites and natural resources as
well as agricultural areas. The allocation of labor to land is
comparable to Crusoe’s having to decide on which plot of
ground to build his shelter or in which stream to fish. Because of the
natural, as well as voluntary, limitations on his labor effort, that
area of land on which he produces the highest utility will be
cultivated, and the rest will be left idle. This element also cannot be
separated from any alleged monopolistic element. For if someone objects
that the “withheld” land is of the same
quality as the land in use and therefore that monopolistic
restriction is afoot, it may always be answered that the two pieces of
land necessarily differ—in location
if in no other attribute—and that the very fact that the two
are treated differently on the market tends to confirm this difference.
By what mystical criterion, then, does some outsider assert that the
two lands are economically identical? In the case of capital
goods it is also true that the limitations of available labor supply
will often make idle those goods which are expected to yield a lesser
return as compared with other capital that can be employed by labor.
The difference here is that idle capital goods are always the result of
previous error by producers, since no such idleness
would be necessary if the present events—demands, prices,
supplies—had all been forecast correctly by all the
producers. But though error is always unfortunate, the keeping idle of
unremunerative capital is the best course to follow; it is making the
best of the existing situation, not of the
situation that would have obtained if foresight had been perfect. In
the evenly rotating economy, of course, there would never be idle
capital goods; there would be only idle land and idle labor (to the
extent that leisure is voluntarily preferred to money income). In no
case is it possible to establish an identification of purely
“monopolistic” withholding action.
A similar proposed criterion for distinguishing a monopoly price from a
competitive price runs as follows: In the competitive case,
the marginal factor produces no rent; in the monopoly-price case,
however, use of the monopolized factor is restricted, so that its
marginal use does yield a rent. We may answer, in
the first place, that there is no reason to say that every factor will,
in the competitive case, always be worked until it yields no
rent. On the contrary, every factor is worked in a region of diminishing
but positive marginal product, not zero product. Indeed, as we have
shown above, if the value product of a unit of a factor is zero, it
will not be used at all. Every unit of a factor is used because it
yields a value product; otherwise, it would not be used in production.
And if it yields a value product, it will earn its discounted value
product in income.
It is clear, further, that this criterion could never be applied to a
monopolized labor factor. What labor factor earns a zero
wage in a competitive market? Yet many monopolized (definition 1)
factors are labor factors—such as brand names, unique
services, decision-making ability in business, etc. Land is more
abundant than labor, and therefore some lands will be idle and receive
zero rent. Even here, however, it is only the submarginal
lands that receive no rent; the marginal lands in
use receive some rent, however small.
Furthermore, even if it were true that marginal lands received zero
rent, this would be irrelevant for our discussion. It would apply only
to “poorer” or “inferior,” as
compared with more productive, lands. But a criterion of monopoly or
competitive price must apply, not to factors of different
quality, but to homogeneous factors. The monopoly-price problem is one
of a supply of units of one homogeneous factor, not
of various different factors within the one broad category,
land. In this case, as we have stated, every factor will earn some
value product in a diminishing zone, and not zero.
Since, in the “competitive” case, all factors in
use will earn some rent, there is still no basis for distinguishing a
“competitive” from a
“monopoly” price.
Another very common attempt to distinguish between a
competitive and a monopoly price rests on the alleged ideal of
“marginal-cost pricing.” Failure to set
prices equal to marginal cost is considered an example of
“monopoly” behavior. There are several fatal errors
in this analysis. In the first place, as we shall see further below,
there can be no such thing as “pure
competition,” that hypothetical state in which the
demand curve for the output of a firm is infinitely elastic. Only in
this never-never land does price equal marginal cost in equilibrium.
Otherwise, marginal cost equals “marginal revenue”
in the ERE, i.e., the revenue that a given increment of cost will yield
to the firm. (Only if the demand curve were perfectly elastic would
marginal revenue boil down to “average revenue,” or
price.) There is now no way of distinguishing
“competitive” from
“monopolistic” situations, since marginal
cost will in all cases tend to equal
marginal revenue.
Secondly, this equality is only a tendency that results
from competition; it is not a precondition
of competition. It is a property of the equilibrium of the ERE that the
market economy always tends toward, but never can reach. To uphold it
as a “welfare ideal” for the real world, an ideal
with which to gauge existing conditions, as so many economists have
done, is to misconceive completely the nature of the market and of
economics itself.
Thirdly, there is no reason why firms should ever deliberately balk at
being guided by marginal-cost considerations. Their aiming at
maximum net revenue will see to that. But there is no one simple,
determinate “marginal cost,” because, as we have
seen above, there is no one identifiable
“short-run” period, such as is assumed by current
theory. The firm faces a gamut of variable periods of time for the
investment and use of factors, and its pricing and output decisions
depend on the future period of time which it is considering. Is it
buying a new machine, or is it selling old output piled up in
inventory? The marginal cost considerations will differ in the two
cases.
It is clear that it is impossible to distinguish competitive or
monopolistic behavior on the part of a firm. It is no more possible to
speak of monopoly price in the case of a cartel. In the first place, a
cartel, when it sets the amount of its production in advance
for the next period, is in exactly the same
position as the single firm: it sets the amount of its production at
that point which it believes will maximize its monetary earnings. There
is still no way of distinguishing a monopoly from a competitive or a
subcompetitive price.
Furthermore, we have seen that there is no essential difference between
a cartel and a merger, or between a merger of producers with money
assets and a merger of producers with previously existing capital
assets to form a partnership or corporation. As a result of the
tradition, still in evidence in the literature, of identifying a firm
with a single individual entrepreneur or
producer, we tend to overlook the fact that most existing
firms are constituted through the voluntary merging of monetary assets.
To pursue the similarity further, suppose that firm A wishes to expand
its production. Is there an essential difference between its buying new
land and building a new plant, and its purchasing an old plant owned by
another firm? Yet the latter case, if the plant constitutes all the
assets of firm B, will involve, in fact, a merger of the two firms. The
degree of merger or the degree of independence in the various parts of
the productive system will depend entirely upon the most remunerative
method for the producers concerned. This will also be the
method most serviceable to the consumers. And there is no way of
distinguishing between a cartel, a merger, and one larger firm.
It might be objected at this point that there are many useful, indeed
indispensable, theoretical concepts which cannot be
practically isolated in their pure form in the real world.
Thus, the interest rate, in practice, is not strictly separable from
profits, and the various components of the interest rate are not
separable in practice, but they can be separated in analysis. But these
concepts are each definable in terms independent of one
another and of the complex reality being investigated. Thus,
the “pure” interest rate may never exist in
practice, but the market interest rate is theoretically analyzable into
its components: pure interest rate, price-expectation component, risk
component. They are so analyzable because each of these
components is definable independently of the
complex market-interest rate and, moreover, is
independently deducible from the axioms of praxeology.
The existence and determination of the pure interest rate is strictly
deducible from the principles of human action, time preference, etc.
Each of these components, then, is arrived at a priori
in relation to the concrete market interest rate itself and is deduced
from previously established truths about human action. In all such
cases, the components are definable through independently established
theoretical criteria. In this case, however, there is, as we
have seen, no independent way by which we can define and
distinguish a “monopoly price” from a
“competitive price.” There is no prior
rule available to guide us in framing the distinction. To say that the
monopoly price is formed when the configuration of demand is inelastic
above the competitive price tells us nothing because we have no way of
independently defining the “competitive price.”
To reiterate, the seemingly unidentifiable elements in other areas of
economic theory are independently deducible from the axioms of human
action. Time preference, uncertainty, changes in purchasing power,
etc., can all be independently established by prior reasoning, and
their interrelations analyzed through the method of mental
constructions. The evenly rotating economy can be seen as the
ever-moving goal of the market, through our analysis of the direction
of action. But here, all that we know from prior analysis of human
action is that individuals co-operate on the market to sell and
purchase factors, transform them into products, and expect to sell the
products to others—eventually to final consumers; and that
the factors are sold, and entrepreneurs undertake the production, in
order to obtain monetary income from the sale of their product. How
much any given person will produce of any given good or service is
determined by his expectations of greatest monetary income,
other psychic considerations being equal. But nowhere in the analysis
of such action is it possible to separate conceptually an alleged
“restrictive” from a nonrestrictive act, and
nowhere is it possible to define “competitive
price” in any way that would differ from the free-market
price. Similarly, there is no way of conceptually
distinguishing “monopoly price” from free-market
price. But if a concept has no possible grounding in reality,
then it is an empty and illusory, and not a meaningful, concept. On the
free market there is no way of distinguishing a “monopoly
price” from a “competitive price” or a
“subcompetitive price” or of establishing any
changes as movements from one to the other. No criteria can be found
for making such distinctions. The concept of monopoly price as
distinguished from competitive price is therefore untenable. We can
speak only of the free-market price.
Thus, we conclude not only that there is nothing
“wrong” with “monopoly price,”
but also that the entire concept is meaningless. There is a great deal
of “monopoly” in the sense of a single owner of a
unique commodity or service (definition 1). But we have seen that this
is an inappropriate term and, further, that it has no catallactic
significance. A “monopoly” would be of importance
only if it led to a monopoly price, and we have seen that there is no
such thing as a monopoly price or a competitive price on the market.
There is only the “free-market price.”
We are devoting space to analysis
of monopoly-price theory and its consequences because the theory,
though invalid on the free market, will prove very
useful in analyzing the consequences of monopoly grants by government.
As Mises warns:
It
would be a serious blunder to deduce from the antithesis between
monopoly price and competitive price that the monopoly price is the
outgrowth of the absence of competition. There is always catallactic
competition on the market. Catallactic competition is no less a factor
in the determination of monopoly prices than it is in the determination
of competitive prices. The shape of the demand curve that makes the
appearance of monopoly prices possible and directs the
monopolists’ conduct is determined by the competition of all
other commodities competing for the buyers’ dollars. The
higher the monopolist fixes the price at which he is ready to sell, the
more potential buyers turn their dollars toward other vendible goods.
On the market every commodity competes with all other commodities.
(Mises, Human Action, p. 278)
We are not discussing here the
generally conceded point that monopoly profits are capitalized in
capital gains to the shares of the firm’s stock.
To attain a monopoly price, the
factor-owner must meet two conditions: (a)
He must be a monopolist (in the sense of definition 1) over the factor;
if he were not, the monopoly gain could be bid away by competitors
entering the field; and (b) the demand curve for the
factor must be inelastic above the competitive-price point.
This is the underlying assumption
in Mrs. Joan Robinson’s Economics of Imperfect
Competition.
Bidding takes place among numerous
firms in various industries, not only among firms in the same industry.
An amusing instance of this
concern is this argument for compulsory legal cartelization by West
German industrialists: “that the so-called
unrestricted competition would produce a catastrophe in which
the stronger industries would destroy the weaker and establish
themselves as monopolies.” Create an inefficient
monopoly now to avoid an efficient
monopoly later! M.S. Handler, “German Unionism Supports
Cartels,” New York Times, March 17, 1954,
p. 12. For other such instances, see Charles F.
Phillips, Competition? Yes, but . . .
(Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1955).
What of the allegedly vast
“financial power” of a big firm, rendering it
impervious to cost? In a brilliant article, Professor Wayne Leeman has
pointed out that a larger firm will also have larger volume and will
therefore suffer greater losses when selling below cost. Having a
larger volume, it has more to lose. What is relevant, therefore, is not
the absolute size of the financial resources of the
competing firms, but the size of their resources in relation to their
volume of sales and expenditures. And this changes the
conventional picture drastically. Wayne A. Leeman, “The
Limitations of Local Price-Cutting as a Barrier to Entry,” Journal
of Political Economy, August, 1956, pp. 331–32.
After investigating conditions in
the retail gasoline industry (one particularly subject to
allegedly “cutthroat” competition), an economist
declared:
Some
people think that leading marketers occasionally reduce prices
to drive out competition so that they may later enjoy a monopoly. But,
as one oil man has put it, “That is like trying to sweep back
the ocean to get a dry place to sit down . . . .”
[Competitors] . . . never scare, and never hesitate for long, and would
move in immediately when prices were restored, offering little
opportunity to a single marketer to recoup his losses. (Harold Fleming,
Oil Prices and Competition [American
Petroleum Institute, 1953], p. 54)
Leeman, “The Limitations
of Local Price-Cutting,” pp. 330–31.
A leading oil executive
told Leeman: “We have invested too much in plant and
equipment in this area to want to invite in a host of competitors under
an umbrella of high prices.” Ibid., p.
331.
Leeman points out, in a striking
refutation of one of the myths of our age, that this is precisely
what happened to John D. Rockefeller.
According
to a widely accepted view, he softened up small competitors in the oil
business by a period of intensive price competition, bought them out
for a song, and then raised prices to consumers to make up his losses.
Actually, the softening-up process did not work . . . for Rockefeller
usually ended up paying . . . so handsomely that the sellers, often in
violation of promises made, proceeded to build another plant for its
nuisance value, hoping again to collect a reward from their
benefactor. . . . Rockefeller after a time got tired of
paying . . . “blackmail” and .
. . decided that the best way to hold the dominant position he wanted
was to keep profit margins small all the time. (Ibid.,
p. 332)
Also
see Marian V. Sears, “The American Businessman at
the Turn of the Century,” The Business History
Review, December, 1956, p. 391. Moreover, Professor
McGee has shown, after an intensive investigation, that in not one
instance did Standard Oil attempt “predatory
price-cutting,” thus destroying the Standard Oil myth once
and for all. John S. McGee, “Predatory Price-Cutting: The
Standard Oil (New Jersey) Case,” The Journal of Law
and Economics, October, 1958, pp. 137–69.
Leeman concludes, quite correctly,
that large rather than small firms dominate many markets, not
as a result of victorious cutthroat competition and
monopolistic pricing, but by taking advantage of the low costs of much
large-scale production and keeping prices low in fear of potential
as well as actual rivals. Leeman, “The Limitations of Local
Price-Cutting,” pp. 333–34.
We have found in the literature
only one hint of the discovery of this illusion: Scoville and Sargent, Fact
and Fancy in the T.N.E.C. Monographs, p. 302. See
also Bradford B. Smith, “Monopoly and
Competition,” Ideas on Liberty, No. 3,
November, 1955, pp. 66ff.
In the case of depletable natural
resources, any allocation of use
necessarily involves the use of some of the resource in the
present (even considering the resource as homogeneous) and the
“withholding” of the remainder for allocation to
future use. But there is no way of conceptually distinguishing such
withholding from “monopolistic”
withholding and therefore of discussing a “monopoly
price.”
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