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10. Monopoly and Competition > 3. The Illusion of Monopoly Price > E. Some Problems in the Theory of the...

(1) Location Monopoly

It might be objected that in the case of a location monopoly, a monopoly price can be distinguished from a competitive price on a free market. Let us consider the case of cement. There are cement consumers, say, who live in Rochester. A cement firm in Rochester could competitively charge a mill price of X gold grams per ton. The nearest competitor is stationed in Albany, and freight costs from Albany to Rochester are three gold grams per ton. The Rochester firm is then able to increase its price to obtain (X + 2) gold grams per ton from Rochester consumers. Does its locational advantage not confer upon it a monopoly, and is not this higher price a monopoly price?

First, as we have seen above, the good that we must consider is the good in the hands of the consumers. The Rochester firm is superior locationally for the Rochester market; the fact that the Albany firm cannot compete is not to be blamed on the Rochester firm. Location is also a factor of production. Furthermore, another firm could, if it wished, set itself up in Rochester to compete.

Let us, however, be generous to the location-monopoly theorists and grant that, in a sense (definition 1) this monopoly is enjoyed by all individual sellers of any good or service. This is due to the eternal law of human action, and indeed of all matter, that only one thing can be in one place at one time. The retail grocer on Fifth Street enjoys a monopoly of the sale of groceries for that street; the grocer on Fourth Street enjoys a monopoly of grocery service for his street, etc. In the case of stores which all cluster together in the same block, say radio stores, there are still a few feet of sidewalk over which each owner of a radio store exercises a location monopoly. Location is as specific to a firm or plant as ability is to a person.

Whether this element of location takes on any importance in the market depends on the configuration of consumer demand and on which policy is most profitable for each seller in the concrete case. In some cases a grocer, for example, can charge higher prices for his goods than another because of his monopoly of the block. In that case, his monopoly over the good “eggs available on Fifth Street” has taken on such a significance for the consumers in his block that he can charge them a higher price than the Fourth Street grocer and still retain their patronage. In other cases, he cannot do so because the bulk of his customers will desert him for the neighboring grocer if the latter's prices are lower.

Now, a good is homogeneous if consumers evaluate its units in the same way. If that condition holds, its units will be sold for a uniform price on the market (or rapidly tend to be sold at a uniform price). If, now, various grocers must adhere to a uniform price, then there is no location monopoly.

But what of the case where the Fifth Street grocer can charge a higher price than his competitor? Do we not have here a clear case of an identifiable monopoly price? Can we not say that the Fifth Street grocer who can charge more than his competitor for the same goods has found that the demand curve for his products is inelastic for a certain range above the “competitive price,” the competitive price being taken as that equal to the price charged by his neighbor? Can we not say this even though we recognize that there is no “infringement on consumers’ sovereignty” in this action, since it is due to the specific tastes of his consuming customers? The answer is an emphatic No. The reason is that the economist can never equate a good with some physical substance. A good, we remember, is a quantity of a thing divisible into a supply of homogeneous units. And this homogeneity, we repeat, must be in the minds of the consuming public, not in its physical composition. If a malted milk consumed at a luncheonette is the same good in the minds of consumers as the malted at a fashionable restaurant, then the price of the malted will be the same in both places. On the other hand, we have seen that the consumer buys not only the physical good, but all attributes of a thing, including its name, the wrappings, and the atmosphere in which it is consumed. If most of the consumers differentiate sufficiently between food consumed in the restaurant and food consumed at the luncheonette, so that a higher price can be charged in one case than in the other, then the food is a different good in each case. A malted consumed in the restaurant becomes, for a significant body of consumers, a different good from a malted consumed at the luncheonette. The same situation obtains for brand names, even in those situations where a minority of the consumers do regard several brands as “actually” the same good. As long as the bulk of the consumers regard them as different goods, then they are different goods, and their prices will differ. Similarly, goods may differ physically, but as long as they are regarded by consumers as the same, they are the same good.55

The same analysis applies to the case of location. Where the Fifth Street consumers regard groceries at Fifth Street as a significantly better good than groceries at Fourth Street, so that they are willing to pay more rather than walk the extra distance, then the two will become different goods. In the case of location, there will always be a tendency for the two to be different goods, but very often this will not be significant on the market. For a consumer may and almost always will prefer groceries available on this block to groceries available on the next block, but often this preference will not be enough to overcome any higher price for the former goods. If the bulk of the consumers shift to the latter good at a higher price, the two, on the market, will be the same good. And it is action on the market, real action, that we are interested in, not the nonsignificant pure valuations by themselves. In praxeology we are interested only in preferences that result in, and are therefore demonstrated by, real choices, not in the preferences themselves.

A good cannot be independently established as such apart from consumer preference on the market. Groceries on Fifth Street may be higher in price than groceries on Fourth Street to the Fifth Street consumers. If so, it will be because the former is a different good to the consumers. In the same way, Rochester cement may cost more than Albany cement in Albany to Rochester consumers, but the two are different goods by virtue of their difference in location. And there is no way of determining whether or not the price in Rochester or on Fifth Street is a “monopoly price” or a “competitive price” or of determining what the “competitive price” might be. It certainly could not be the price charged by the other firm elsewhere, since these prices are really for two different goods. There is no theoretical criterion by which we can distinguish simple locational income to sites from alleged “monopoly” income to sites.

There is another reason for abandoning any theory of locational monopoly price. If all sites are purely specific in locational value, there is no sense to the statement that they earn a “monopoly rent.” For monopoly price, according to the theory, can be established only by selling less of a good and thus commanding a higher price. But all locational properties of a site differ in quality because they differ in location, and therefore there can be no restriction of sales to part of a site. Either a site is in production, or it is idle. But the idle sites necessarily differ in location from the sites in use and are therefore idle because their value productivity is inferior. They are idle because they are submarginal, not because they are “monopolistically” withheld parts of a certain homogeneous supply.

The locational-monopoly-price theorist, then, is refuted whichever way he turns. If he takes a limited view of locational monopoly (in the sense of definition 1) and confines it to such examples as Rochester vs. Albany, he can never establish a criterion for monopoly price, for another firm can enter Rochester, either actually or potentially, to bid away any locational profit that the first firm may earn. His prices cannot be compared with those of his competitors, because they are selling different goods. If the theorist takes an extensive view of locational monopoly—which would take into consideration the fact that every location necessarily differs from every other—and compares locations a few feet apart, then there is no sense at all in talking of “monopoly price,” for (a) the price of a product at one location cannot be precisely compared with another, because they are different goods, and (b) each site is different in locational quality, and therefore no site can be conceptually split up into different homogeneous units—some to be sold and some to be withheld from the market. Each site is a unit in itself. But such a splitting is essential for the establishment of a monopoly-price theory.

  • 55. See the reference to Abbott, Quality and Competition, in note 28 above.