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.
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.
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.
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.
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.”