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10. Monopoly and Competition > 5. The Theory of Monopolistic or Imperfect...

C. Chamberlin and Selling Cost

One of Professor Chamberlin's most important contributions is alleged to have been his sharp distinction between “selling cost” and “production cost.”84 “Production costs” are supposed to be the legitimate expenses needed to increase supply in order to meet given consumer demand schedules. “Selling costs,” on the other hand, are supposed to be directed toward influencing consumers and increasing their demand schedules for the firm's product.

This distinction is completely spurious.85 Why does a businessman invest money and incur any costs whatever? To supply a hoped-for demand for his product. Every time he improves his product he is hoping that consumers will respond by increasing their demands. In fact, all costs expended on raw materials are incurred in an attempt to increase consumer demand beyond what it would have been in the absence of these costs. Therefore, every production cost is also a “selling cost.”

Conversely, selling costs are not the sheer waste or even tyranny that monopolistic-competition theorists have usually assumed. The various expenses designated as “selling costs” perform definite services for the public. Basically, they furnish information to the public about the goods of the seller. We live in a world where there can be no “perfect knowledge” of products by anyone—especially consumers, who are faced with a myriad of available products. Selling costs are therefore important in providing information about the product as well as about the firm. In some cases, e.g., displays, the “selling cost” itself directly improves the quality of the product in the mind of the consumer. It must always be remembered that the consumer is not simply buying a physical product; he may also be buying “atmosphere,” prestige, service, etc., all of which have tangible reality to him and are valued accordingly.86

The view that a selling cost is somehow an artifact of “monopolistic competition” stems only from the peculiar assumptions of “pure competition.” In the “ideal” world of pure competition, we remember, each firm's demand is given to it as infinitely elastic, so that it can sell whatever it wants at the ruling price. Naturally, in such a situation, no selling costs are necessary, because a market for a product is automatically assured. In the real world, however, there is no perfect knowledge, and the demand curves are neither given nor infinitely elastic.87 Therefore, firms have to try to increase demands for their products and to carve out market areas for themselves.

Chamberlin falls into another error in implying that selling costs, such as advertising, “create” consumer demands. This is the determinist fallacy. Every man as a self-owner freely decides his own scale of valuations. On the free market no one can force another to choose his product. And no other individual can ever “create” someone's values for him; he must adopt the value himself.88

  • 84. Chamberlin, Theory of Monopolistic Competition, pp. 123ff. Chamberlin includes in selling costs advertising, sales expenses, and store displays.
  • 85. See Mises, Human Action, p. 319. Also see Kermit Gordon, “Concepts of Competition and Monopoly—Discussion,” American Economic Review, Papers and Proceedings, May, 1955, pp. 486–87.
  • 86. It is surely highly artificial to call bright ribbons on a packaged good a “production cost,” while labeling bright ribbons decorating the store selling the good as a “selling cost.”
  • 87. Cf. Alfred Nicols, “The Development of Monopolistic Competition and the Monopoly Problem,” Review of Economics and Statistics, May, 1949, pp. 118–23.
  • 88. See Mises:
    The consumer is, according to ... legend, simply defenseless against “high-pressure” advertising. If this were true, success or failure in business would depend on the mode of advertising only. However, nobody believes that any kind of advertising would have succeeded in making the candlemakers hold the field against the electric bulb, the horsedrivers against the motorcars. ... But this implies that the quality of the commodity advertised is instrumental in bringing about the success of an advertising campaign. ... The tricks and artifices of advertising are available to the seller of the better product no less than to the seller of the poorer product. But only the former enjoys the advantages derived from the better quality of his product. (Mises, Human Action, pp. 317–18)