3. The Illusion of Monopoly Price
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.
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.
In this section we investigate a further problem.
Granted that there is nothing wrong with monopoly prices, how tenable is the very
Concept of Monopoly Price on the Free Market. Can it be distinguished at all from competitive price,
its supposed polar opposite? To answer this question, we must explore what the theory of
monopoly price is all about. 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.
The same confusion exists in the laws concerning monopoly.
Despite constitutional warnings against vagueness, the Sherman Anti-Trust 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.
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
The 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 non-control.
That is, both have absolute control over the quantity they produce and the price which
they attempt to get, and absolute non-control over the price and quantity transaction that
finally takes place.
We are, of course, not considering here particular uncertainties of agriculture resulting from
climate, etc.
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
The Theory of Money and Credit
For this is precisely the action of everyone in the economy – the small wheat farmer,
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 Mises posts its prices each day does not mean that Mises has some sort of mysterious control of its price over the consumer.
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.
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, insofar 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. Land owner, 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 trademark, which the wheat farmer
has not. This, however, is surely a case of putting the cart before the horse. The brand
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 buyer's 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 polin, to sell, that is, the only seller of any given good, definition one.
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.
Tom 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 goodwill 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. Economists have often charged, for example, that consumers who will pay a
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 non-physical 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.
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
is 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 non-golfer is more likely than a habitual player to believe that all brands of golf
are virtually alike. Hence, there is hardly any way that definition one 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, that is, an industry, neckties, bowties, bowties
with polka dots, etc., or bowties 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 one, 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.
Oddly, despite the reams of literature on monopolies, very few economists have bothered to define monopoly, and these problems have therefore been overlooked.
Joan 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.
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.
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 17th century jurist, Lord Cook.
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.
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
This definition of monopoly goes back to the common law and acquired great political importance in England during the 16th and 17th 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 cast of favorites, were the objects of vehement attack for several centuries.
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 anti-monopoly spirit was deeply ingrained in America and the original Maryland Constitution
declared that monopolies were odious and contrary to principles of commerce.
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.
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.
Many writers have objected that brand names and trademarks, 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.
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
The definition 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.
is 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
Another chocolate firm of the Hershey label would be an equivalent perpetration of an
invasive act of fraud and forgery.
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
In short, it is not so much the name per se, which an individual owns, but the name as
an affiliate of his person.
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 neo-classical 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.
b.
The Neoclassical Theory of Monopoly Price
In previous sections we have referred to a monopoly price as one established either by
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.
If conditions are such that the monopolist can secure higher net proceeds by selling
a smaller quantity of his product at a higher price than by selling a greater quantity of
The monopoly price doctrine may be summed up as follows.
A certain quantity of a good, when produced and sold, yields a competitive price on the
A monopolist or a cartel of firms can, if the demand is inelastic at the competitive price point, restrict sales and raise the price, to arrive at the point of maximum returns.
If on the other hand the demand as it presents itself to the monopolist or cartel is elastic at the competitive price point, the monopolist will not restrict sales to attain a higher price.
and higher price.
As a result, as Mises points out, there is no need to be concerned with the monopolist
in the sense of definition one above.
Whether or not he is the sole producer of a commodity is unimportant and irrelevant
for catalactic problems.
It becomes important only if the configuration of his demand enables him to restrict sales
If he learns about the inelastic demand after he has erroneously produced too great a stock,
the monopolist must destroy or withhold part of his stock.
After that, he restricts production of the commodity to the most remunerative level.
The inelastic demand giving rise to an opportunity to monopolize may present itself either to
a single monopolist of a given product, or to an industry as a whole, when organized
into a cartel of the different producers.
In the latter case, the demand as it presents itself to each firm is elastic.
At the competitive price, if one firm raises its price, the customers preponderantly shift
to purchasing from its competitors.
On the other hand, if the firms are cartelized, in many cases the lesser range of substitution
by Consumers would render the demand as presented to the cartel inelastic.
C. Consequences of Monopoly Price Theory 1. The Competitive Environment
Before engaging in a critical analysis of the monopoly price theory itself, we might
explore some of the consequences which do or do not follow from it.
In this section, we for the moment assume that the monopoly price theory is valid.
We are devoting space to analysis of monopoly price theory and its consequences because
the theory, though invalid on the free market, will prove very useful in analyzing the consequences
of monopoly grants by government.
In the first place, it is not true that the monopolist, used here in the sense of Definition
Section 3, an Obtainer of a Monopoly Price, is removed from the influence of competition
or has the power to dictate to consumers at will.
The best of the monopoly price theorists admit that the monopolist is as subject to the forces
of competition as are other firms.
The monopolist cannot set prices as high as he would like, being limited by the configurations
of consumer demand.
By definition, in fact, the demand as presented to the monopolist becomes elastic above the
monopoly price point.
By definition, the monopoly price point is that which maximizes the firm's or the cartel's
income.
Above that price, any further restriction of production and sales will lower the monopolist's
monetary income.
This implies that the demand will become elastic above that point, just as it is also elastic
above the competitive price point when that is established on the market.
Consumers make it elastic by their power of substituting purchases of other goods.
Many other goods compete directly in their use value to the consumer.
If some firm or combination of firms should, for example, achieve a monopoly price for
cake soap, housewives can shift to detergents and thus limit the height of the monopoly
price.
But in addition, all goods without exception compete for the consumer's dollar or gold
ounce.
If the price of yachts becomes too high, the consumer can substitute expenditure on mansions,
he can substitute books for television sets, etc.
As Mises warns, it would be a serious blunder to deduce from the antithesis between monopoly
price and competitive price that the monopoly price is the outgrowth of the absence of competition.
There is always catalactic competition on the market.
Competition is no less a factor in the determination of monopoly prices than it is in the determination
of competitive prices.
The demand that makes the appearance of monopoly prices possible, and directs the monopolist's
conduct, is determined by the competition of all other commodities competing for the
buyer's dollars.
The higher the monopolist fixes the price at which he is ready to sell, the more potential
buyers turn their dollars toward other vendable goods.
On the market, every commodity competes with all other commodities.
Furthermore, as the market advances, as capital is invested and the market becomes more and
and more specialized, the demand for each product tends to become more and more elastic.
As the market develops, the range of consumers' goods available increases enormously.
The more consumers' goods are available, the more goods can be purchased by consumers.
And the more elastic, setterus paribus, the demand for each good will tend to be.
As a result, the opportunities for the establishment of monopoly prices will tend to diminish as
the market and capitalist methods develop.
2.
Monopoly Profit vs. Monopoly Gain to a Factor
Many monopoly price theorists have declared that establishment of the monopoly price means
that the monopolist is able to attain permanent monopoly profits.
This is then contrasted with competitive profits and losses, which, as we have seen, disappear
in the evenly rotating economy.
Under competition, if one firm is seen to be making great profits in a particular productive
process, other firms rush in to take advantage of the anticipated opportunities, and the
profits disappear.
But in the case of the monopolist, it is asserted, his unique position allows him to keep making
these profits permanently.
We are not discussing here the generally conceited point that monopoly profits are capitalized
in capital gains to the shares of the firm's stock.
To use such terminology is to misconceive the nature of profit and loss.
Profits and losses are purely the results of entrepreneurial activity, and that activity
is the consequence of the uncertainty of the future.
Entrepreneurship is the action on the market that takes advantage of estimated discrepancies
between selling prices and buying prices of factors.
The better forecasters make profits, and the incorrect ones suffer losses.
In the evenly rotating economy where everyone has settled down to an unchanging round of
activity, there can be no profit or loss because there is no uncertainty on the market.
The same is true for the monopolist.
In the evenly rotating economy, he obtains his specific monopoly gain not as an entrepreneur,
But as the owner of the product which he sells, his monopoly gain is an added income to his
monopolized product, whether for an individual or for a cartel, it is this product which
earns more income through restriction of its supply.
The question arises, why cannot other entrepreneurs seize the gainful opportunity and enter into
to the production of this good, thereby tending to eliminate the opportunity.
In the case of the cartel, this is precisely the tendency that will always prevail and
lead to the breakup of a monopoly price position.
Even if new firms entering the industry are bought off by being offered quotal positions
in the old cartel, and both the new and the old firms have been able to agree on allocations
In such situations, the pressure will become greater and greater for the more efficient firms to cut losses.
For new firms will be tempted to acquire a share in the monopoly gains, and ever more will be created until the entire cartel operation is rendered unprofitable, there being too many firms to share the benefits.
In such situations, the pressure will become greater and greater for the more efficient firms to cut loose from the cartel and to refuse further to provide a comfortable shelter for the host of inefficient firms.
In the case of a single monopolist, either his brand name and unique goodwill with the consumers
prevents others from taking away his monopoly gains, or else he is a recipient of special
monopoly privilege from the government, in which case other producers are prevented by force
from producing the same good. Our analysis of monopoly gain must be pursued further.
We have said that the gain is derived from income from the sale of a certain product.
But this product must be produced by factors.
And we have seen that the return to any product is resolved into returns to the factors which produce it.
Such imputation in the market must also take place for monopoly gains.
Let us say for example that the Staunton washing machine company has been able to achieve a monopoly price for its product.
It is clear that the monopoly gain cannot be attributed to the machines, the plant, etc., which produce the washers.
If the Staunton company bought these machines from other producers,
The Theory of Money and Credit
Income, except time income could accrue to the owner of a capital good, because every
capital good must, in turn, be produced by higher order factors.
Ultimately, all capital goods are resolvable into labor, land and time factors.
But if the Staunton washing machine company cannot itself achieve a monopoly gain from
The Theory of Money and Credit The Theory of Money and Credit
A defined name, for example, a certain kind of labor factor is being monopolized.
A name, as we have seen, is a unique identifying label for a person or a group of persons acting cooperatively,
and is therefore an attribute of the person and his energy.
Considered generally, labor is the term designating the productive efforts of personal energy,
A brand name, therefore, is an attribute of a labor factor, specifically the owner or owners of the firm, or considered catallactically, the brand name represents the decision-making rent accruing to the owner and his name.
If a monopoly price is achieved by the baseball prowess of Mickey Mantle, this is a specific monopoly gain attributable to a labor factor.
In both of these cases, then, the monopoly price stems not simply from the unique possession of the final product,
but more basically from the unique possession of one of the factors necessary to the final product.
A monopoly gain might also be imputable to ownership of a unique natural resource, or
land factor.
Thus, a monopoly price for diamonds may be attributable to a monopoly of diamond mines,
from which diamonds must be ultimately produced.
Under the analysis of monopoly price, then, there cannot be, in the evenly rotating system,
any such thing as monopoly profits.
There are only specific monopoly income gains to owners of labor or land factors.
No monopoly gain can accrue to an owner of a capital good.
If a monopoly price has been imposed because of a grant of monopoly privilege by the state,
then obviously the monopoly gain is attributable to this special privilege.
To attain a monopoly price, the factor owner must meet two conditions.
A. He must be a monopolist, in the sense of definition one, over the factor.
If he were not, the monopoly gain could be bid away by competitors entering the field.
And B. The demand for the factor must be inelastic above the competitive price point.
3. A World of Monopoly Prices? Is it possible, within the framework of monopoly price theory,
to assert that all prices on the free market may be monopoly prices? This is the underlying
assumption in Mrs. Joan Robinson's Economics of Imperfect Competition. Can all selling
There are two ways in which we may analyze this problem.
One is by turning our attention to the monopolized industry.
As we have seen, the industry with a monopoly price restricts production in that industry,
either by a cartel or a single firm, thereby releasing non-specific factors to enter other
fields of production.
But it is evidently impossible to conceive of a world of monopoly prices, because this
would imply a piling up of unused nonspecific factors.
Since wants do not remain unfulfilled, labor and other nonspecific factors will be used
somewhere, and the industries that acquire more factors and produce more cannot be monopoly
price industries.
We may also consider consumer demand.
We have seen that a necessary condition for the establishment of monopoly price is a consumer's
demand schedule inelastic above the competitive price point.
Obviously, it is impossible for every industry to have such an inelastic demand schedule.
For the definition of inelastic is that consumers will spend a greater total sum of money on
the good when the price is higher.
But consumers have a certain given total stock of money assets and money income, as well
as a given amount at any one time which they may allocate to consumption spending.
If they spend more on a certain good, they have less to spend on other goods, therefore
they cannot spend more on every good, and not all prices can be monopoly prices.
There can never, then, be a world of monopoly prices, even assuming monopoly price theory.
Because of the fixity of consumers' monetary stock, and the employment of displaced factors,
monopoly prices could not be established in more than approximately half of the economy's industries.
4. Cutthroat Competition
A popular theme in the literature is the alleged evil of cutthroat competition. Curiously,
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.
The stronger firm, with the capital resources to endure the losses, then drives the weaker
firm out of business and establishes a monopoly of the field.
But first, what is wrong with such a monopoly?
Definition 1.
What is wrong with the fact that the firm more efficient in serving the consumer remains
in business, while consumers refuse to patronize the inefficient firm?
A firm's suffering losses signifies that it is not as successful as other firms in serving
consumer desires.
Factors then shift from the inefficient to the efficient firms.
A firm's going out of business harms no owner of any factor it employs and injures only
the entrepreneur who miscalculated in his advance production decisions.
A firm goes out of business precisely because it suffers entrepreneurial losses.
That is, its monetary revenues in sales to consumers are less than the money it paid
out previously to owners of factors.
But so much money had to be paid out for factors.
That is, costs were so high because these factors could earn as much money elsewhere.
If this entrepreneur cannot profitably employ the factors at their given prices, the reason
is that factor owners can sell their services to other firms.
Insofar as factors may be specific to the firm and to the extent that their owners will
accept a reduced price and income as the price of the firm's product is reduced, total
All money costs can be reduced, and the firm can be maintained in operation.
Therefore, failure by business firms is due solely to entrepreneurial error in forecasting,
and to entrepreneurial inability to secure the factors of production by outbidding those
firms more successful in serving the consumer.
Banking takes place among numerous firms in various industries, not only among firms in
the same industry.
Thus, the elimination of inefficient firms cannot harm factor owners or lead to their
unemployment, since their failure was due precisely to the more attractive competing
bids made by other firms, or in some cases, to the alternatives of leisure or production
outside the market.
Their failure also helps consumers by transferring resources from wasteful to efficient producers.
It is largely the entrepreneurs who suffer from their own errors, errors incurred through
their own voluntarily adopted risks.
It is curious that the critics of cutthroat competition are generally the same as those
For those who complain about the market's subversion of consumer sovereignty, for selling a product at very low prices, even at short-term losses, is a bonanza to the consumers, and there is no reason why this gift to the consumers should be deplored.
Furthermore, if the consumers were really indignant about this form of competition,
they would scornfully refuse to accept this gift, and instead continue to patronize the
allegedly victimized competitor.
When they do not do so, and instead rush to acquire the bargains, they are indicating
their perfect contentment with this state of affairs.
From the point of view of consumer's sovereignty or individual sovereignty, there is nothing
at all wrong with cutthroat competition.
The only conceivable problem is the one usually cited, that after the single firm has driven
everyone else out of business through sustained selling at very low prices, then the final
All monopolists will restrict sales and raise its price to a monopoly price.
Even granting for a moment the tenability of the monopoly price concept, this does not
seem a very likely occurrence.
In the first place, it is time enough to complain after the monopoly price is established, especially
monopoly since we have seen that we cannot consider monopoly per se, definition one,
as an evil.
An amusing instance of this concern is this argument for compulsory legal cartelization
by West German industrialists, that the so-called unrestricted competition would produce a catastrophe
in which the stronger industries would destroy the weaker and establish themselves as monopolies.
Create an Inefficient Monopoly Now to Avoid an Efficient Monopoly Later
Secondly, a firm will not always be able to achieve a monopoly price, in all such cases
including a. where not all the other firms in the industry can be driven out, or b. where
the demand is such that the monopolist cannot achieve a monopoly price, the cutthroat competition
Human is then a pure boon with no harmful effects.
Incidentally it is by no means true that the large firms will always be the strongest in
a price-cutting war.
Often, depending on the concrete conditions, it is the smaller, more mobile firm, not burdened
with heavy investments, that is able to cut its costs, particularly when its factors are
are more specific to it, such as the labor of its management, and out-compete the larger firm.
In such cases, of course, there is no monopoly price problem whatever.
The fact that the lowly pushcart peddler for centuries has been set upon by governmental
violence at the behest of his more lordly and heavily capitalized competitors bears witness
What of the allegedly vast financial power of a big firm rendering it impervious to cost?
In a brilliant article, Professor Wayne Lehman has pointed out that a larger firm will also
have larger volume and will therefore suffer greater losses when selling below cost.
Having a larger volume, it has more to lose.
What is relevant, therefore, is not the absolute size of the financial resources of the competing
firms, but the size of their resources in relation to their volume of sales and expenditures,
and this changes the conventional picture drastically.
Suppose, however, that after this lengthy and costly process, a firm has finally been
What is there to prevent this monopoly gain from attracting other entrepreneurs who will try to undercut the existing firm and achieve some of the gain for themselves?
What is to prevent new firms from coming in and driving the price down to competitive levels again?
Is the firm to resume cutthroat competition and the same deliberate losing process once more?
In that case, we are likely to find that consumers of the good will be receiving gifts far more often than facing a monopoly price.
After investigating conditions in the retail gasoline industry, one particularly subject to allegedly cutthroat competition,
and Human Action, economist Harold Fleming declared,
Professor Lehmann has pointed out that the smaller firm, driven out by cutthroat competition, may simply close down, wait for the larger firm to reap its expected gain of a higher monopoly price, and then reopen.
More important, even if the small firm is driven into bankruptcy, its physical plant remains intact, and it may be bought by a new entrepreneur at bargain prices.
As a result, the new firm will be able to produce at very low cost and damage the victor firm considerably.
To avoid this threat, the big firm would have to delay raising its price for the very long time required for the small plant to wear out or become obsolete.
Lehman also demonstrates that the big firm could not keep new small firms out by a mere threat of cutthroat competition.
For A, new firms will probably interpret the high price charged by the monopolist as a
sign of inefficiency, providing a ripe opportunity for profits, and B, the monopolist can demonstrate
his power satisfactorily only by actually selling at low prices for long periods of
of Time, hence only by keeping its costs down and its prices low, that is, by not extracting
a monopoly price, can the victor firm keep out potential rivals.
But this means that the cutthroat competition, far from being a route to a monopoly price,
was a pure gift to consumers and a pure loss to the victor.
A leading oil executive told Lehman,
We have invested too much in plant and equipment in this area
to want to invite in a host of competitors under an umbrella of high prices.
But what of a standard problem brought forward by critics of cutthroat competition?
Cannot the big firm check the entry of efficient small firms
by simply buying up the new rival's plant and putting it out of production?
Perhaps a short period of cutthroat price-cutting will convince the new small firm of the advantage
of selling out, and will permit the monopolist to avoid the long periods of losses just mentioned.
No one seems to realize, however, the high costs such buying will entail.
Lehman points out that the really efficient small firm can demand such a high price for
for its assets as to make the whole procedure prohibitively expensive.
And further, any later attempt by the large firm to recoup its losses by charging the
monopoly price will only invite new entry by other firms and redouble the expensive
buying-out process again and again.
Buying-out competitors, then, will be even more costly than simple cutthroat competition,
which we have seen to be unprofitable.
Lehman points out in a striking refutation of one of the myths of our age that this is
precisely what happened to John D. Rockefeller.
According to a widely accepted view, he softened up small competitors in the oil business by
a period of intensive price competition, bought them out for a song and then raised prices
to consumers to make up his losses.
Actually the softening up process did not work, for Rockefeller usually ended up paying
so handsomely that the sellers, often in violation of promises made, proceeded to build another
plant for its nuisance value, hoping again to collect a reward from their benefactor.
Rockefeller after a time got tired of paying blackmail and decided that the best way to
To hold the dominant position he wanted was to keep profit margins small all the time.
Lehman concludes quite correctly that large rather than small firms dominate many markets
not as a result of victorious cutthroat competition and monopolistic pricing, but by taking advantage
A final argument against the doctrines of cutthroat competition is that it is impossible to determine
whether it is taking place or not.
The fact that a monopoly might ensue afterward does not even establish the motive, and is
is certainly no criterion of cutthroat procedures.
One proposed criterion has been selling below costs, most cogently, below what is usually
termed variable costs, the expenses of using factors in production, assuming previously
sunk investment in a fixed plant.
But this is no criterion at all.
As we have already declared, there is no such thing as costs, apart from speculation on
a higher future price, once the stock has been produced.
Costs take place along the path of decisions to produce, at each step along the way that
investments of money and effort are made in factors.
The allocations, the opportunities for gone, take place at each step, as future production
decisions must be taken and commitments made.
Once the stock has been produced, however, and there is no expectation of a price rise,
the sale is costless, since there are no advantages for gone by selling the product.
in making the sale being here considered negligible for purposes of simplification.
Therefore, the stock will tend to be sold at whatever price is obtainable.
There is no such thing, then, as selling below costs on stock already produced.
The cutting of price may just as well be due to inability to dispose of stock at any higher
D. The Illusion of Monopoly Price on the Unhampered Market
and that it constitutes no infringement on any legitimate interpretation of individual's sovereignty or even of consumer's sovereignty.
Yet there has been a great deficiency in the economic literature on this whole issue, a failure to realize the illusion in the entire concept of monopoly price.
If we turn to the definition of monopoly price, we find that there is assumed to be a competitive
price to which a higher monopoly price, an outcome of restrictive action, is contrasted.
Yet if we analyze the matter closely, it becomes evident that the entire contrast is an illusion.
In the market, there is no discernible, identifiable competitive price, and therefore there is no way of distinguishing, even conceptually, any given price as a monopoly price.
The alleged competitive price can be identified neither by the producer himself nor by the disinterested observer.
Let us take a firm which is considering the production of a certain good.
The firm can be a monopolist in the sense of producing a unique good, or it can be an oligopolist among a few firms.
Whatever its position, it is irrelevant, because we are interested only in whether or not it can achieve a monopoly price as compared to a competitive price.
This, in turn, depends on the elasticity of the demand as it is presented to the firm over a certain range.
The producer must decide how much of the good to produce and sell in a future period, that is, at the time when this demand will become relevant.
He will set his output at whatever point is expected to maximize his monetary earnings, other psychic factors being equal, taking into consideration the necessary monetary expenses of production for each quantity, that is, the amounts that can be produced for each amount of money invested.
As an entrepreneur, he will attempt to maximize profits, as a labor owner to maximize his monetary income, as a landowner to maximize his monetary income from that factor.
On the basis of this logic of action, the producer sets his investment to produce a certain stock, or as a factor owner to sell a certain amount of service.
Assuming that he has correctly estimated his demand, the intersection of the two will establish
the market equilibrium price.
The critical question is this, is the market price a competitive price or a monopoly price?
The answer is that there is no way of knowing.
Contrary to the assumptions of the theory, there is no competitive price which is clearly
The Theory of Money and Credit
How is anyone, including the producer himself, to know whether or not this market price is competitive or monopoly?
Suppose that the producer decides that he will make more money if he produces less of the good in the next period.
Is the higher price to be gained from such a cutback necessarily a monopoly price?
Why could it not just as well be a movement from a subcompetitive price to a competitive
price?
In the real world a demand is not simply given to a producer but must be estimated and discovered.
If a producer has produced too much in one period and in order to earn more income produces
The Theory of Money and Credit
to a competitive price also involves a restriction of production of this good, coupled, of course,
with an expansion of production in other lines by the released factors.
There is no way whatever to distinguish such a restriction and corollary expansion from
the alleged monopoly price situation.
If the restriction is accompanied by increased leisure for the owner of a labor factor, rather
than increased production of some other good on the market, it is still an expansion of
the yield of a consumer's good, leisure.
There is still no way of determining whether the restriction resulted in a monopoly or
A Competitive Price, or to what extent the motive of increased leisure was involved.
To define a monopoly price as a price attained by selling a smaller quantity of a product
at a higher price is therefore meaningless, since the same definition applies to the competitive
price as compared with a subcompetitive price.
There is no way to define monopoly price because there is also no way of defining the competitive
price to which the former must refer.
Many writers have attempted to establish some criterion for distinguishing a monopoly price
from a competitive price.
Some call the monopoly price that price achieving permanent long-run monopoly profits for a
This is contrasted to the competitive price, at which, in the evenly rotating economy, profits disappear.
Yet, as we have already seen, there are never permanent monopoly profits, but only monopoly gains to owners of land or labor factors.
Money costs to the entrepreneur who must buy factors of production will tend to equal money revenues in the evenly rotating economy, whether the price is competitive or monopoly.
The monopoly gains, however, are secured as income to labor or land factors.
There is, therefore, never any identifiable element that could provide a criterion of
the absence of monopoly gain.
With a monopoly gain, the factor's income is greater.
Without it, it is less.
But where is the criterion for distinguishing this from a change in the income of a factor
for legitimate demand and supply reasons?
How to Distinguish a Monopoly Gain from a Simple Increase in Factor Income
Another theory attempts to define a monopoly gain as income to a factor greater than that
received by another, similar, factor.
Thus, if Mickey Mantle receives a greater monetary income than another outfielder, that
difference represents the monopoly gain resulting from his natural monopoly of unique
The Crucial Difficulty with this approach is that it implicitly adopts the old classical
fallacy of treating all the various labor factors, as well as all the various land factors,
as somehow homogeneous.
If all the labor factors are somehow one good, then the variations in income accruing to
to each must be explained by reference to some sort of monopolistic or other mysterious
element.
Yet a good with a homogeneous supply is only a good if all its units are interchangeable,
as we saw at the beginning of this work.
But the very fact that Mantle and the other outfielder are treated differently in the
in the market signifies that they are selling different, not the same, goods.
Just as in tangible commodities, so in personal labor services, whether sold to other producers
or to consumers directly, each seller may be selling a unique good, and yet he is competing
with more or less close substitutability against all the other sellers for the purchases of
of Consumers or Lower Order Producers.
But since each good or service is unique, we cannot state that the difference between
the prices of any two represents any sort of monopoly price.
Monopoly price vis-à-vis competitive price can refer only to alternative prices of the
same good.
Ricky Mantle may indeed be a person of unique ability and a monopolist, as is everyone else,
over the disposition of his own talents, but whether or not he is achieving a monopoly
price, and therefore a monopoly gain from his service, can never be determined.
This analysis is equally applicable to land.
It is just as illegitimate to dub the difference between the income of the site of the Empire
State Building and that of a rural general store, a monopoly gain as to apply the same
concept to the additional income of Mickey Mantle.
The fact that both areas are land makes them no more homogeneous on the market than the
fact that Mickey Mantle and Joe Dokes are both baseball players, or, in a broader category,
both laborers.
The fact that each is remunerated at a different price and income signifies that they are considered
different on the market.
To treat differential gains for different goods as instances of monopoly gain is to
render the term completely devoid of significance.
Neither is the attempt to establish the existence of idle resources as a criterion of monopolistic
Withholding of Factors Anymore Valid
Idle labor resources will always mean increased leisure, and therefore the leisure motive will
always be intertwined with any alleged monopolistic motive. It therefore becomes
impossible to separate them. The existence of idle land may always be due to the fact
of the relative scarcity of labor as compared with available land.
This relative scarcity makes it more serviceable to consumers and hence more remunerative to
invest labor in certain areas of land and not in others.
The land areas least productive of potential earnings will be forced to lie idle, the amount
depending on how much labor supply is available.
We must stress that all land, that is, every nature-given resource, is involved here, including
urban sites and natural resources as well as agricultural areas.
The allocation of labor to land is comparable to Crusoe's having to decide on which plot
of ground to build his shelter, or in which stream to fish.
Because of the natural, as well as voluntary, limitations on his labor effort, that area
of land on which he produces the highest utility will be cultivated, and the rest will be left
idle.
This element also cannot be separated from any alleged monopolistic element, for if someone
objects that the withheld land is of the same quality as the land in use, and therefore
For that monopolistic restriction is afoot, it may always be answered that the two pieces
of land necessarily differ in location if in no other attribute, and that the very fact
that the two are treated differently on the market tends to confirm this difference.
By what mystical criterion, then, does some outsider assert that the two lands are economically
identical?
In the case of capital goods, it is also true that the limitations of available labor supply
will often make idle those goods which are expected to yield a lesser return, as compared
with other capital that can be employed by labor.
The difference here is that idle capital goods are always the result of previous error by
producers.
It's no such idleness would be necessary if the present events, demands, prices, supplies,
had all been forecast correctly by all the producers.
But though error is always unfortunate, the keeping idle of unremunerative capital is
the best course to follow.
It is making the best of the existing situation, not of the situation that would have obtained
if foresight had been perfect.
In the evenly rotating economy, of course, there would never be idle capital goods.
There would be only idle land and idle labor, to the extent that leisure is voluntarily
preferred to money income.
In no case is it possible to establish an identification of purely monopolistic withholding
action.
A similar proposed criterion for distinguishing a monopoly price from a competitive price runs as follows.
In the competitive case, the marginal factor produces no rent.
In the monopoly price case, however, use of the monopolized factor is restricted, so that its marginal use does yield a rent.
We may answer in the first place that there is no reason to say that every factor will, in the competitive case, always be worked until it yields no rent.
On the contrary, every factor is worked in a region of diminishing but positive marginal product, not zero product.
Indeed, as we have shown, if the value product of a unit of a factor is zero, it will not
be used at all. Every unit of a factor is used because it yields a value product, otherwise
it would not be used in production, and if it yields a value product, it will earn its
discounted value product in income. It is clear further that this criterion could never
Never be applied to a monopolized labor factor.
What labor factor earns a zero wage in a competitive market?
Yet many monopolized, definition one, factors are labor factors, such as brand names, unique
services, decision-making ability in business, etc.
Land is more abundant than labor, and therefore some lands will be idle and receive zero rent.
Even here, however, it is only the sub-marginal lands that receive no rent.
The marginal lands in use receive some rent, however small.
Furthermore, even if it were true that marginal lands received zero rent, this would be irrelevant
for our discussion.
It would apply only to poorer or inferior as compared with more productive lands.
That a criterion of monopoly or competitive price must apply not to factors of different
quality but to homogeneous factors.
The monopoly price problem is one of a supply of units of one homogeneous factor, not of
various different factors within the one broad category, land.
In this case, as we have stated, every factor will earn some value product in a diminishing
zone and not zero.
In the case of depletable natural resources, any allocation of use necessarily involves
the use of some of the resource in the present, even considering the resource as homogeneous
and the withholding of the remainder for allocation to future use.
But there is no way of conceptually distinguishing such withholding from monopolistic withholding,
and therefore of discussing a monopoly price.
Since in the competitive case, all factors in use will earn some rent, there is still
no basis for distinguishing a competitive from a monopoly price.
Another very common attempt to distinguish between a competitive and a monopoly price
rests on the alleged ideal of marginal cost pricing.
Failure to set prices equal to marginal cost is considered an example of monopoly behavior.
There are several fatal errors in this analysis.
In the first place, as we shall see further, there can be no such thing as pure competition
that hypothetical state in which the demand for the output of a firm is infinitely elastic.
Only in this never-never land does price equal marginal cost in equilibrium.
Otherwise, marginal cost equals marginal revenue in the ERE, that is, the revenue that a given
increment of cost will yield to the firm.
Only if the demand were perfectly elastic would marginal revenue boil down to average
revenue or price.
There is now no way of distinguishing competitive from monopolistic situations, since marginal
cost will, in all cases, tend to equal marginal revenue.
Secondly, this equality is only a tendency that results from competition.
It is not a precondition of competition.
It is a property of the equilibrium of the ERE that the market economy always tends toward
but never can reach.
To uphold it as a welfare ideal for the real world, an ideal with which to gauge existing
conditions as so many economists have done, is to misconceive completely the nature of
of the Market and of Economics itself.
Thirdly, there is no reason why firms should ever deliberately balk at being guided by marginal cost considerations.
Their aiming at maximum net revenue will see to that.
But there is no one simple determinate marginal cost, because, as we have seen,
There is no one identifiable short-run period such as is assumed by current theory.
The firm faces a gamut of variable periods of time for the investment and use of factors,
and its pricing and output decisions depend on the future period of time which it is considering.
Is it buying a new machine, or is it selling old output piled up in inventory?
The marginal cost considerations will differ in the two cases.
It is clear that it is impossible to distinguish competitive or monopolistic behavior on the
part of a firm.
It is no more possible to speak of monopoly price in the case of a cartel.
In the first place, a cartel, when it sets the amount of its production in advance for
for the next period is in exactly the same position as the single firm.
It sets the amount of its production at that point which it believes will maximize its
monetary earnings.
There is still no way of distinguishing a monopoly from a competitive or a sub-competitive
price.
Furthermore, we have seen that there is no essential difference between a cartel and
and Merger or between a merger of producers with money assets and a merger of producers
with previously existing capital assets to form a partnership or corporation.
As a result of the tradition, still in evidence in the literature, of identifying a firm with
a single individual entrepreneur or producer, we tend to overlook the fact that most existing
Funding Firms are constituted through the voluntary merging of monetary assets.
To pursue the similarity further, suppose that Firm A wishes to expand its production.
Is there an essential difference between its buying new land and building a new plant,
and its purchasing an old plant owned by another firm?
Yet the latter case, if the plant constitutes all the assets of Firm B, will involve in
fact a merger of the two firms.
The degree of merger or the degree of independence in the various parts of the productive system
will depend entirely upon the most remunerative method for the producers concerned.
This will also be the method most serviceable to the consumers, and there is no way of distinguishing
It might be objected at this point that there are many useful, indeed indispensable theoretical concepts which cannot be practically isolated in their pure form in the real world.
Thus, the interest rate, in practice, is not strictly separable from profits, and the various
components of the interest rate are not separable in practice, but they can be separated in
analysis.
But these concepts are each definable in terms independent of one another, and of the complex
reality being investigated.
Thus, the pure interest rate may never exist in practice, but the market interest rate
is theoretically analyzable into its components.
Pure interest rate, price expectation component, risk component.
They are so analyzable because each of these components is definable independently of the
the complex market interest rate, and, moreover, is independently deducible from the axioms
of praxeology.
The existence and determination of the pure interest rate is strictly deducible from the
principles of human action, time preference, etc.
Each of these components, then, is arrived at a priori, in relation to the concrete market
interest rate itself, and is deduced from previously established truths about human action.
In all such cases, the components are definable through independently established theoretical
criteria.
In this case, however, there is, as we have seen, no independent way by which we can define
and distinguish a monopoly price from a competitive price.
There is no prior rule available to guide us in framing the distinction.
To say that the monopoly price is formed when the configuration of demand is inelastic above
the competitive price tells us nothing because we have no way of independently defining the
competitive price.
To reiterate, the seemingly unidentifiable elements in other areas of economic theory
are independently deducible from the axioms of human action.
Time preference, uncertainty, changes in purchasing power, etc. can all be independently established
by prior reasoning and their interrelations analyzed through the method of mental constructions.
The evenly rotating economy can be seen as the ever-moving goal of the market through
through our analysis of the direction of action.
But here, all that we know from prior analysis of human action is that individuals cooperate
on the market to sell and purchase factors, transform them into products, and expect to
sell the products to others, eventually to final consumers, and that the factors are
are sold and entrepreneurs undertake the production in order to obtain monetary income from the
sale of their product.
How much any given person will produce of any given good or service is determined by
his expectations of greatest monetary income, other psychic considerations being equal.
But nowhere in the analysis of such action is it possible to separate conceptually an
alleged restrictive from a non-restrictive act, and nowhere is it possible to define
competitive price in any way that would differ from the free market price.
Similarly, there is no way of conceptually distinguishing monopoly price from free market
price.
But if a concept has no possible grounding in reality, then it is an empty and illusory
and not a meaningful concept.
On the free market there is no way of distinguishing a monopoly price from a competitive price
or a subcompetitive price, or of establishing any changes as movements from one to the other.
No criteria can be found for making such distinctions.
The concept of monopoly price as distinguished from competitive price is therefore untenable.
We can speak only of the free market price.
Thus we conclude not only that there is nothing wrong with monopoly price, but also that the
entire concept is meaningless.
There is a great deal of monopoly in the sense of a single owner of a unique commodity or
service, definition one, but we have seen that this is an inappropriate term, and further
that it has no catallactic significance.
A monopoly would be of importance only if it led to a monopoly price, and we have seen
that there is no such thing as a monopoly price or a competitive price on the market.
There is only the free market price.
E. Some problems in the theory of the illusion of monopoly price.
1. Location monopoly.
It might be objected that in the case of 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 3 gold grams per ton.
The Rochester firm is then able to increase its price to obtain X plus 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, 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 5th street enjoys a monopoly of the sale of groceries for that street.
The grocer on 4th 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 5th Street has taken on such
a significance for the consumers in his block that he can charge them a higher price than
the 4th 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 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
The Theory of Money and Credit
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.
The same analysis applies to the case of location, where the 5th Street consumers regard groceries
Groceries at 5th Street as a significantly better good than groceries at 4th 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 non-significant 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 5th Street may be higher in price than groceries on 4th Street to the 5th 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
The Theory of Money and Credit The Theory of Money and Credit
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
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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 sub-marginal, 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
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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,
2.
Natural Monopoly
A favorite target of the critics of monopoly is the so-called natural monopoly, or public
A typical 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.
In the first place, such a limited space monopoly is just one case in which only one firm in a field is profitable.
How many firms will be profitable in any line of production is an institutional question,
and depends on such concrete data as the degree of consumer demand, the type of product sold,
The Physical Productivity of the Processes, the Supply and Pricing of Factors, the Forecasting of Entrepreneurs, etc.
Spatial limitations may be unimportant, as in the case of the grocers.
The spatial limits may allow only the narrowest of monopolies, the monopoly over the portion of sidewalk owned by the seller.
on the other hand conditions may be such that only one firm may be feasible in
the industry but we have seen that this is irrelevant monopoly is a meaningless
appellation unless monopoly price is achieved and once again there is no way
of determining whether the price charged for the good is a monopoly price or not
and this applies to all circumstances including a nationwide telephone firm, a
local water company or an outstanding baseball player. All these persons or
firms will be monopolies within their industry and in all these cases the
dichotomy between monopoly price and competitive price is still an illusory
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No case, therefore, on the free market can a monopoly price be conceptually distinguished
from a competitive price.
All prices on the free market are competitive.
As Mises writes, prices are a market phenomenon.
They are the resultant of a certain constellation of market data, of actions and reactions of
the members of a market society.
It is vain to meditate what prices would have been if some of their determinants had been
different.
It is no less vain to ponder on what prices ought to be.
Everybody is pleased if the prices of things he wants to buy drop and the prices of the
things he wants to sell rise.
Any price determined on a market is the necessary outgrowth of the interplay of the forces operating,
That is, demand and supply.
Whatever the market situation which generated this price may be, with regard to it, the
price is always adequate, genuine and real.
It cannot be higher if no bidder ready to offer a higher price turns up, and it cannot
be lower if no seller ready to deliver at a lower price turns up.
Only the appearance of such people ready to buy or sell can alter prices.
Economics does not develop formulas which would enable anybody to compute a correct price
different from that established on the market by the interaction of buyers and sellers.
This refers also to monopoly prices.
No alleged fact-finding and no armchair speculation can discover another price at which demand
and supply would become equal.
The failure of all experiments to find a satisfactory solution for the limited space monopoly of
Public Utilities clearly proves this truth.