(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.40 In the first place, it is not true that the “monopolist” (used here in the sense of definition 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 curve as presented to the monopolist becomes elastic above the monopoly-price point. There has been an unfortunate tendency of writers to refer to an “elastic demand curve” or an “inelastic demand curve” without pointing out that every curve has different ranges along which there will be varying degrees of elasticity or inelasticity. 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 curve 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 the curve 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, or he can substitute books for television sets, etc.41

Furthermore, as the market advances, as capital is invested and the market becomes more and more specialized, the demand curve 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, ceteris paribus, the demand curve 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.

• 40We are devoting space to analysis of monopoly-price theory and its consequences because the theory, though invalid on the free market, will prove useful in analyzing the consequences of monopoly grants by government.
• 41As 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 catallactic competition on the market. Catallactic competition is no less a factor in the determination of monopoly prices than it is in the determination of competitive prices. The shape of the demand curve that makes the appearance of monopoly prices possible and directs the monopolists’ conduct is determined by the competition of all other commodities competing for the buyers’ dollars. The higher the monopolist fixes the price at which he is ready to sell, the more potential buyers turn their dollars toward other vendible goods. On the market every commodity competes with all other commodities. (Mises, Human Action, p. 278)