One common prounion argument is that unions benefit the economy through forcing higher wages on the employers. At these higher wages the workers will become more efficient, and their marginal productivity will rise as a result. If this were true, however, no unions would be needed. Employers, ever eager for greater profits, would see this and pay higher wages now to reap the benefits of the allegedly higher productivity in the future.

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.

A favorite target of the critics of “monopoly” is the so-called “natural monopoly” or “public utility,” where “competition is naturally not feasible.” A typically cited case is the water supply of a city. It is supposed to be technologically feasible for only one water company to exist for serving a city. No other firms are therefore able to compete, and special interference is alleged to be necessary to curb monopoly pricing by this utility.

So far we have established that there is nothing “wrong” with a monopoly price, either when instituted by one firm or by a cartel; that, in fact, whatever price the free market (unhampered by violence or the threat of violence) establishes will be the “best” price. We have also shown the impossibility of separating “monopolizing” from efficiency considerations in cartel actions or of separating technology from profitability in general; and we have seen the great instability of the cartel form.

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.

In previous sections36 we have refereed to a monopoly price as one established either by a monopolist or by a cartel of producers. At this point we must investigate the theory more closely. A succinct definition of monopoly price has been supplied by Mises: