Books / Digital Text

10. Monopoly and Competition > 3. The Illusion of Monopoly Price

A. Definitions of Monopoly

Before investigating the theory of monopoly price, we must begin by defining monopoly. Despite the fact that monopoly problems occupy an enormous quantity of economic writings, little or no clarity of definition exists.22 There is, in fact, enormous vagueness and confusion on the subject. Very few economists have formulated a coherent, meaningful definition of monopoly.

A common example of a confused definition is: “Monopoly exists when a firm has control over its price.” This definition is a mixture of confusion and absurdity. In the first place, on the free market there is no such thing as “control” over the price in an exchange; in any exchange the price of the sale is voluntarily agreed upon by both parties. No “control” is exercised by either party; the only control is each person's control over his own actions—stemming from his self-sovereignty—and consequently his control will be over his own decision to enter or not to enter into an exchange at any hypothetical price. There is no direct control over price because price is a mutual phenomenon. On the other hand, each person has absolute control over his own action and therefore over the price which he will attempt to charge for any particular good. Any man can set any price that he wants for any quantity of a good that he sells; the question is whether he can find any buyers at that price. Similarly, of course, any buyer can set any price at which he will purchase a certain good; the question is whether he can find a seller at that price. It is this process, indeed, of mutual bids and offers that yields the daily prices on the market.

There is an all-too-common assumption, however, that if we compare, say, Henry Ford and a small wheat farmer, the two differ enormously in their respective powers of control. It is believed that the wheat farmer finds his price “given” to him by the market, while Ford can “administer” or “set his own” price. The wheat farmer is allegedly subject to the impersonal forces of the market, and ultimately to the consumer, while Ford is, to a greater or lesser extent, the master of his own fate, if not indeed the ruler of the consumers. Further, it is believed that Ford's “monopoly power” stems from his being “large” in relation to the automobile market, while the farmer is a “pure competitor” because he is “small” compared to the total supply of wheat. Usually, Ford is not considered an “absolute’‘ monopolist, but someone with a vague “degree of monopoly power.”

In the first place, it is completely false to say that the farmer and Ford differ in their control over price. Both have exactly the same degree of control and of noncontrol: i.e., both have absolute control over the quantity they produce and the price which they attempt to get;23 and absolute noncontrol over the price-and-quantity transaction that finally takes place. The farmer is free to ask any price he wants, just as Ford is, and is free to look for a buyer at such a price. He is not in the least compelled to sell his produce to the organized “markets” if he can do better elsewhere. Every producer of every product is free, in a free-market society, to produce as much as he wants of whatever he possesses or can purchase and to try to sell it, at whatever price he can get, to anyone he can find.24 Naturally, every seller, as we have repeatedly stated, will attempt to sell his produce for the highest possible price; similarly, every buyer will attempt to purchase goods at the lowest possible price. It is precisely the voluntary interaction of these buyers and sellers that establishes the entire supply and demand structure for consumers’ and producers’ goods. To accuse Ford or a waterworks or any other producer of “charging whatever the traffic will bear” and to take this as a sign of monopoly is pure nonsense, for this is precisely the action of everyone in the economy: the small wheat farmer, the laborer, the landowner, etc. “Charging whatever the traffic will bear” is simply a rather emotive synonym for charging as high a price as can be freely obtained.

Who officially “sets” the price in any exchange is a completely trivial and irrelevant technological question—a matter of institutional convenience rather than economic analysis. The fact that Macy's posts its prices each day does not mean that Macy's has some sort of mysterious “control” of its price over the consumer;25 similarly, that large-scale industrial buyers of raw materials often post their bid prices does not mean that they exercise some sort of extra control over the price obtained by the growers. Rather than acting as a means of control, in fact, posting simply furnishes needed information to all would-be buyers and/or sellers. The process of price determination through the interaction of value scales occurs in precisely the same way regardless of the concrete details and institutional conditions of market arrangements.26

Each individual producer, then, is sovereign over his own actions; he is free to buy, produce, and sell whatever he likes and to whoever will purchase. The farmer is not compelled to sell to any particular market or to any particular company, any more than Ford is compelled to sell to John Brown if he does not wish to do so (say, because he can get a higher price elsewhere). But, as we have seen, in so far as a producer wishes to maximize his monetary return, he does submit himself to the control of consumers, and he sets his output accordingly. This is true of the farmer, of Ford, or of anyone else in the entire economy—landowner, laborer, service-producer, product-owner, etc. Ford, then, has no more “control” over the consumer than the farmer has.

One common objection is that Ford is able to acquire “monopoly power” or “monopolistic power” because his product has a recognized brand name or trade-mark, which the wheat farmer has not. This, however, is surely a case of putting the cart before the horse. The brand name and the wide knowledge of the brand come from consumers’ desire for the product attached to that particular brand and are therefore a result of consumer demand rather than a pre-existing means for some sort of “monopolistic power” over the consumers. In fact, farmer Hiram Jones is perfectly free to stamp the brand name “Hiram Jones Wheat” on his product and attempt to sell it on the market. The fact that he has not done so signifies that it would not be a profitable step in the concrete market condition of his product. The chief point is that in some cases consumers and lower-order entrepreneurs consider each individual brand name as representing a unique product, while in other cases purchasers consider the output of one firm—one product-owner or set of product-owners operating jointly—as identical in use-value with products of other firms. Which situation will occur is entirely dependent on the buyers’ valuations in each concrete case.

Later in this chapter we shall analyze in greater detail the tangled web of fallacies involved in the various theories of “monopolistic competition”; at this point we are attempting to arrive at a definition of monopoly per se. To proceed: There are three possible coherent definitions of monopoly. One is derived from its linguistic roots: monos (only) and polein (to sell), i.e., the only seller of any given good (definition 1). This is certainly a legitimate definition, but it is an extraordinarily broad one. It means that, whenever there is any differentiation at all among individual products, the individual producer and seller is a “monopolist.” John Jones, lawyer, is a “monopolist” over the legal services of John Jones; To m Williams, doctor, is a “monopolist” over his own unique medical services, etc. The owner of the Empire State Building is a “monopolist” over the rental services in his building. This definition, therefore, labels all consumer distinctions between individual products as establishing “monopolies.”

It must be remembered that only consumers can decide whether two commodities offered on the market are one good or two different goods. This issue cannot be settled by a physical inspection of the product. The elemental physical nature of the good may be only one of its properties; in most cases, a brand name, the “good will” of a particular company, or a more pleasant atmosphere in the store will differentiate the product from its rivals in the view of many of its customers. The products then become different goods for the consumers. No one can ever be certain in advance—least of all the economist—whether a commodity sold by A will be treated on the market as homogeneous with the same basic physical good sold by B.27,28

Hence, there is hardly any way that definition 1 of “monopoly” can be successfully used. For this definition depends on how we choose a “homogeneous good,” and this can never be decided by an economist. What constitutes a homogeneous commodity” (i.e., an industry)—neckties, bow ties, bow ties with polka dots, etc., or bow ties made by Jones? Only consumers will decide, and they, as different consumers, will be likely to decide differently in each concrete case. Use of definition 1, therefore, will probably reduce to the barren definition of monopoly as each man's exclusive ownership of his own property—and this, absurdly, would make every single person a monopolist!29

Definition 1, then, is coherent, but highly inexpedient. Its usefulness is very limited, and the term has acquired highly charged emotional connotations from past use of quite different definitions. For reasons detailed below, the term “monopoly” has sinister and evil connotations to most people. “Monopolist” is generally a word of abuse; to apply the term “monopolist” to at least the vast majority of the population and perhaps to every man would have a confusing and even ludicrous effect.

The second definition is related to the first, but differs very significantly. It, in fact, was the original definition of monopoly and the very definition responsible for its sinister connotations in the public mind. Let us turn to its classic expression by the great seventeenth-century jurist, Lord Coke:

A monopoly is an institution or allowance by the king, by his grant, commission, or otherwise ... to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade.30

In other words, by this definition, monopoly is a grant of special privilege by the State, reserving a certain area of production to one particular individual or group. Entry into the field is prohibited to others and this prohibition is enforced by the gendarmes of the State.

This definition of monopoly goes back to the common law and acquired great political importance in England during the sixteenth and seventeenth centuries, when an historic struggle took place between libertarians and the Crown over the issue of monopoly as opposed to freedom of production and enterprise. Under this definition of the term, it is not surprising that “monopoly” took on connotations of sinister interest and tyranny in the public mind. The enormous restrictions on production and trade, as well as the establishment by the State of a monopoly caste of favorites, were the objects of vehement attack for several centuries.31

That this definition was formerly important in economic analysis is clear in the following quotation from one of the first American economists, Francis Wayland:

A monopoly is an exclusive right granted to a man, or to a monopoly of men, to employ their labor or capital in some particular manner.32

It is obvious that this type of monopoly can never arise on a free market, unhampered by State interference. In the free economy, then, according to this definition, there can be no “monopoly problem.”33 Many writers have objected that brand names and trade-marks, generally considered as part of the free market, really constitute grants of special privilege by the State. No other firm can “compete” with Hershey chocolates by producing its own product and calling it Hershey chocolates.34 Is this not a State-imposed restriction on freedom of entry? And how can there be “real” freedom of entry under such conditions?

This argument, however, completely misconceives the nature of liberty and of property. Every individual in the free society has a right to ownership of his own self and to the exclusive use of his own property. Included in his property is his name, the linguistic label which is uniquely his and is identified with him. A name is an essential part of a man's identity and therefore of his property. To say that he is a “monopolist” over his name is saying no more than that he is a “monopolist” over his own will or property, and such an extension of the word “monopolist” to every individual in the world would be an absurd usage of the term. The “governmental” function of defense of person and property, vital to the existence of a free society so long as any people are disposed to invade them, involves the defense of each person's particular name or trademark against the fraud of forgery or imposture. It means the outlawing of John Smith's pretending to be Joseph Williams, a prominent lawyer, and selling his own legal advice after stating to clients that he is selling that of Williams. This fraud is not only implicit theft of the consumer, but it is also abusing the property right of Joseph Williams to his unique name and individuality. And the use by some other chocolate firm of the Hershey label would be an equivalent perpetration of an invasive act of fraud and forgery.35

Before adopting this definition of monopoly as the proper one, we must consider a final alternative: the defining of a monopolist as a person who has achieved a monopoly price (definition 3). This definition has never been explicitly set forth, but it has been implicit in the most worthwhile of the neoclassical writings on this subject. It has the merit of focusing attention on the important economic question of monopoly price, its nature and consequences. In this connection, we shall now investigate the neoclassical theory of monopoly price and inquire whether it really has the substance it seems at first glance to possess.

  • 22. The same confusion exists in the laws concerning monopoly. Despite constitutional warnings against vagueness, the Sherman AntiTrust Act outlaws “monopolizing” actions without once defining the concept. To this day there has been no clear legislative decision concerning what constitutes illegal monopolistic action.
  • 23. We are, of course, not considering here particular uncertainties of agriculture resulting from climate, etc.
  • 24. For further discussion, see Murray N. Rothbard, “The Bogey of Administered Prices,” The Freeman, September, 1959, pp. 39–41.
  • 25. On the contrary, the consumers control Macy's to the extent that the store desires monetary income. Cf. John W. Scoville and Noel Sargent, eds., Fact and Fancy in the T.N.E.C. Monographs (New York: National Association of Manufacturers, 1942), p. 312.
  • 26. One reason often given for ascribing “control over price” to Ford and not the small wheat grower is that Ford is so large that his actions affect the market price of his product, while the farmer is so small that his actions do not affect the price. On this, see the critique below of “monopolistic competition” theories.
  • 27. Economists have often charged, for example, that consumers who will pay a higher price for the same good at a store with a more pleasant atmosphere are acting “irrationally.” Actually, they are by no means doing so, since consumers are buying not just a physical can of beans, but a can of beans sold in a certain store by certain clerks, and these factors may (or may not) make a difference to them. Businessmen are far less motivated by such “nonphysical” considerations (although good will affects their purchases too), not because they are “more rational” than consumers, but because they are not concerned, as consumers are, with their own value scales in deciding their purchases. As we have seen above, businessmen are generally motivated purely by the expected revenue that goods will bring on the market. For an excellent treatment of the definition of “homogeneous product,” see G. Warren Nutter, “The Plateau Demand Curve and Utility Theory,” Journal of Political Economy, December, 1955, pp. 526–28. Also see Alex Hunter, “Product Differentiation and Welfare Economics,” Quarterly Journal of Economics, November, 1955, pp. 533–52.
  • 28. Professor Lawrence Abbott, in one of the outstanding theoretical works of recent years, demonstrates also that as civilization and the economy advance, products will become more and more differentiated and less and less homogeneous. For one thing, greater differentiation occurs at the consumer than at the producer level, and the expanding economy takes over an increasing proportion of goods once made by the consumer himself and therefore supplies more finished goods than raw materials to the consumer than formerly (bread rather than flour, sweaters rather than wool yarn, etc.). Thus, there is greater opportunity for differentiation.
         Furthermore, to the familiar charge that business advertising tends to create differentiation in the consumer's mind that is not “really” there, Abbott replies incisively that the reverse is more likely to be true and that advancing civilization increases the consumer's perception and discrimination of differences of which he was previously ignorant. Writes Abbott:
    as man becomes more civilized, he develops greater powers of perception with regard to quality differences. Subjective homogeneity may exist even when objective homogeneity does not, due to the inability or unwillingness of buyers to perceive differences between almost identical products and discriminate between them. ... As a society matures and education improves, people learn to develop more acute powers of discrimination. Their wants become more detailed. They begin ... to develop a preference, say, not simply for white wine, but for 1948 Chablis. ... People generally tend to underestimate the significance of apparently trivial differences in fields in which they are not expert. An unmusical person may be unwilling to concede that there is any difference in tone between a Steinway and a Chickering piano, being unable himself to detect it. A nongolfer is more likely than a habitual player to believe that all brands of golf balls are virtually alike." (Lawrence Abbott, Quality and Competition [New York: Columbia University Press, 1955], pp. 18–19, and chap. I)Also see ibid., pp. 45–46 and Edward H. Chamberlin, "Product Heterogeneity and Public Policy" in Towards a More General Theory of Value (New York: Oxford University Press, 1957), p. 96.

  • 29. Oddly, despite the reams of literature on monopolies, very few economists have bothered to define monopoly, and these problems have therefore been overlooked. Mrs. Robinson, in the beginning of her famous Economics of Imperfect Competition, saw the difficulty and then evaded the issue throughout the rest of the book. She concedes that under careful analysis either a monopoly would be defined as every producer's control over his own product or monopoly could simply not exist on the free market at all. For competition exists among all products for the consumer's dollar, while very few articles are rigorously homogeneous. Mrs. Robinson then tries to evade the issue by falling back on “common sense” and defining monopoly as existing where there is a “marked gap” between the product and other substitutes the consumer may buy. But this will not do. Economics, in the first place, can establish no quantitative laws, so that there is nothing we can say about sizes of gaps. When does the gap become “marked”? Secondly, even if such “laws” were meaningful, there would be no way to measure the cross-elasticities of demands, the elasticity of substitution between the products, etc. These elasticities of substitution are changing all the time and could not be measured successfully even if they all remained constant, since supply conditions are always changing. No laboratory exists where all economic factors may be held fixed. After this point in her discussion, Mrs. Robinson practically forgets all about heterogeneity of product. Joan Robinson, Economics of Imperfect Competition (London: Macmillan & Co., 1933), pp. 4–6. Also cf. Hunter, “Product Differentiation and Welfare Economics,” pp. 547ff.
  • 30. Quoted in Richard T. Ely and others, Outlines of Economics (3rd ed.; New York: Macmillan & Co., 1917), pp. 190–91. Blackstone gave almost the same definition and called monopoly a “license or privilege allowed by the king.” Also see A. Leo Weil, Chicago Conference, p. 86.
  • 31. The onrush of monopoly grants by Queen Elizabeth I and Charles I provoked resistance from even the Crown's subservient judges, and, in 1624, Parliament declared that “all monopolies are altogether contrary to the laws of this realm and are and shall be void.” This antimonopoly spirit was deeply ingrained in America, and the original Maryland constitution declared that monopolies were “odious” and “contrary to ... principles of commerce.” Ely, Outlines of Economics, pp. 191–92. Also see Francis A. Walker, Political Economy (New York: Henry Holt & Co., 1911), pp. 483–84.
  • 32. Francis Wayland, The Elements of Political Economy (Boston: Gould & Lincoln, 1854), p. 116. Cf. this later definition by Arthur Latham Perry: “A monopoly, as the derivation of the word implies, is a restriction imposed by a government upon the sale of certain services.” Perry, Political Economy, p. 190. In recent years this definition has all but died out. A rare current example is: “Monopoly exists when government by its coercive power limits to a particular person or organization, or combination of them, the right to sell particular goods or services. ... It is an infringement of the right to make a living.” Heath, Citadel, Market, and Altar, p. 237.
  • 33. As Weil stated: “Monopolies cannot be created by association or agreement. We now have no letters patent giving exclusive right. ... It is therefore wholly unjustifiable to use the term monopoly as applied to the effects of industrial consolidation.” Weil, Chicago Conference, pp. 86 f.
  • 34. For example, Edward H. Chamberlin, Theory of Monopolistic Competition (7th ed.; Cambridge: Harvard University Press, 1956), pp. 57 ff., 270 ff.
  • 35. It might be objected that these concepts are vague and give rise to problems. Problems do arise, but they are not insuperable. Thus, if one man is named Joseph Williams, does this preclude anyone else from having the same name, and is any future Joseph Williams to be considered a criminal? The answer is clearly: No, so long as there is no attempt by one to impersonate the other. In short, it is not so much the name per se which an individual owns, but the name as an affiliate of his person.
Shield icon library