Is it possible, within the framework of monopoly-price theory, to assert that all prices on the free market may be monopoly prices?44 Can all selling prices be monopoly prices?

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.

But is not monopolizing action a restriction of production, and is not this restriction a demonstrably antisocial act? Let us first take what would seem to be the worst possible case of such action: the actual destruction of part of a product by a cartel. This is done to take advantage of an inelastic demand curve and to raise the price to gain a greater monetary income for the whole group. We can visualize, for example, the case of a coffee cartel burning great quantities of coffee.

A common argument holds that cartel action involves collusion. For one firm may achieve a “monopoly price” as a result of its natural abilities or consumer enthusiasm for its particular product, whereas a cartel of many firms allegedly involves “collusion” and “conspiracy.” These expressions, however, are simply emotive terms designed to induce an unfavorable response. What is actually involved here is co-operation to increase the incomes of the producers. For what is the essence of a cartel action?

We do not know, and economics cannot tell us, the optimum size of a firm in any given industry. The optimum size depends on the concrete technological conditions of each situation, as well as on the state of consumer demand in relation to the given supply of various factors in this and in other industries. All these complex questions enter into the decisions of producers, and ultimately of consumers, concerning how large the firms in various lines of production will be.

Analysis demonstrates that a cartel is an inherently unstable form of operation. If the joint pooling of assets in a common cause proves in the long run to be profitable for each of the individual members of the cartel, then they will act formally to merge into one large firm. The cartel then disappears in the merger. On the other hand, if the joint action proves unprofitable for one or more members, the dissatisfied firm or firms will break away from the cartel, and, as we shall see, any such independent action almost always destroys the cartel.

There are other arguments that opponents of cartels use in decrying cartel action. One thesis asserts that there is something wicked about formerly competing firms now uniting, e.g., “restricting competition” or “restraining trade.” Such restriction is supposed to injure the consumers’ freedom of choice. As Hutt phrased it in his previously cited article: “Consumers are free ... and consumers’ sovereignty is realizable, only to the extent to which the power of substitution exists.”

The myth of the evil cartel has been greatly bolstered by the nightmare image of “one big cartel.” “This is all very well,” one may say, “but suppose that all the firms in the country amalgamated or cartelized into One Big Cartel. What of the horrors then?”

WE HAVE SEEN THAT IN the free market economy people will tend to produce those goods most demanded by the consumers.1 Some economists have termed this system “consumers’ sovereignty.” Yet there is no compulsion about this.

The metaphorical shibboleth of “consumers’ sovereignty” has misled even the best economists. Many writers have used it as an ideal with which to contrast the allegedly imperfect free-market system. An example is Professor W.H.