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. 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 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 noncontrol: i.e., both have absolute control over the quantity they produce and the price which they attempt to get;23 and absolute noncontrol over the price-and-quantity transaction that finally takes place. 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 he wants of whatever he possesses or can purchase and to try to sell it, at whatever price he can get, to anyone he can find.24 Naturally, every seller, as we have repeatedly stated, will attempt to sell his produce for the highest possible price; similarly, every buyer will attempt to purchase goods at the lowest possible price. It is precisely the voluntary interaction of these buyers and sellers that establishes the entire supply and demand structure for consumers’ and producers’ goods. To accuse Ford or a waterworks or any other producer of “charging whatever the traffic will bear” and to take this as a sign of monopoly is pure nonsense, for this is precisely the action of everyone in the economy: the small wheat farmer, the laborer, the landowner, etc. “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 Macy’s posts its prices each day does not mean that Macy’s has some sort of mysterious “control” of its price over the consumer;25 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.26

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, in so far 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—landowner, 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 trade-mark, which the wheat farmer has not. This, however, is surely a case of putting the cart before the horse. 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 buyers’ 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 polein (to sell), i.e., the only seller of any given good (definition 1). 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; To m 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 “good will” 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.27 ,28

Hence, there is hardly any way that definition 1 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” (i.e., an industry)—neckties, bow ties, bow ties with polka dots, etc., or bow ties 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 1, 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!29

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. For reasons detailed below, 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 seventeenth-century jurist, Lord Coke:

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.30

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 of the State.

This definition of monopoly goes back to the common law and acquired great political importance in England during the sixteenth and seventeenth 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 caste of favorites, were the objects of vehement attack for several centuries.31

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.32

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.”33 Many writers have objected that brand names and trade-marks, 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.34 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 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. It means 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 chocolate firm of the Hershey label would be an equivalent perpetration of an invasive act of fraud and forgery.35

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 neoclassical 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.

• 22The same confusion exists in the laws concerning monopoly. Despite constitutional warnings against vagueness, the Sherman AntiTrust 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.
• 23We are, of course, not considering here particular uncertainties of agriculture resulting from climate, etc.
• 24For further discussion, see Murray N. Rothbard, “The Bogey of Administered Prices,” The Freeman, September, 1959, pp. 39–41.
• 25On the contrary, the consumers control Macy’s to the extent that the store desires monetary income. Cf. John W. Scoville and Noel Sargent, eds., Fact and Fancy in the T.N.E.C. Monographs (New York: National Association of Manufacturers, 1942), p. 312.
• 26One reason often given for ascribing “control over price” to Ford and not the small wheat grower is that Ford is so large that his actions affect the market price of his product, while the farmer is so small that his actions do not affect the price. On this, see the critique below of “monopolistic competition” theories.
• 27Economists have often charged, for example, that consumers who will pay 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 “nonphysical” 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. For an excellent treatment of the definition of “homogeneous product,” see G. Warren Nutter, “The Plateau Demand Curve and Utility Theory,” Journal of Political Economy, December, 1955, pp. 526–28. Also see Alex Hunter, “Product Differentiation and Welfare Economics,” Quarterly Journal of Economics, November, 1955, pp. 533–52.
• 28Professor 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 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 nongolfer is more likely than a habitual player to believe that all brands of golf balls are virtually alike.” (Lawrence Abbott, Quality and Competition [New York: Columbia University Press, 1955], pp. 18–19, and chap. I)Also see ibid., pp. 45–46 and Edward H. Chamberlin, “Product Heterogeneity and Public Policy” in Towards a More General Theory of Value (New York: Oxford University Press, 1957), p. 96.
  
   
• 29Oddly, despite the reams of literature on monopolies, very few economists have bothered to define monopoly, and these problems have therefore been overlooked. Mrs. 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. Joan Robinson, Economics of Imperfect Competition (London: Macmillan & Co., 1933), pp. 4–6. Also cf. Hunter, “Product Differentiation and Welfare Economics,” pp. 547ff.
• 30Quoted in Richard T. Ely and others, Outlines of Economics (3rd ed.; New York: Macmillan & Co., 1917), pp. 190–91. Blackstone gave almost the same definition and called monopoly a “license or privilege allowed by the king.” Also see A. Leo Weil, Chicago Conference, p. 86.
• 31The 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 antimonopoly spirit was deeply ingrained in America, and the original Maryland constitution declared that monopolies were “odious” and “contrary to ... principles of commerce.” Ely, Outlines of Economics, pp. 191–92. Also see Francis A. Walker, Political Economy (New York: Henry Holt & Co., 1911), pp. 483–84.
• 32Francis Wayland, The Elements of Political Economy (Boston: Gould & Lincoln, 1854), p. 116. Cf. this later definition by Arthur Latham Perry: “A monopoly, as the derivation of the word implies, is a restriction imposed by a government upon the sale of certain services.” Perry, Political Economy, p. 190. In recent years this definition has all but died out. A rare current example is: “Monopoly exists when government by its coercive power limits to a particular person or organization, or combination of them, the right to sell particular goods or services. ... It is an infringement of the right to make a living.” Heath, Citadel, Market, and Altar, p. 237.
• 33As Weil stated: “Monopolies cannot be created by association or agreement. We now have no letters patent giving exclusive right. ... It is therefore wholly unjustifiable to use the term monopoly as applied to the effects of industrial consolidation.” Weil, Chicago Conference, pp. 86 f.
• 34For example, Edward H. Chamberlin, Theory of Monopolistic Competition (7th ed.; Cambridge: Harvard University Press, 1956), pp. 57 ff., 270 ff.
• 35It 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 the same name, and is any future Joseph Williams to be considered a criminal? The answer is clearly: No, so long as there is no attempt by one to impersonate the other. In short, it is not so much the name per se which an individual owns, but the name as an affiliate of his person.

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:

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 his supply at a lower price, there emerges a monopoly price higher than the potential market price would have been in the absence of monopoly.37

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 market. A monopolist or a cartel of firms can, if the demand curve 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 curve 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. As a result, as Mises points out, there is no need to be concerned with the “monopolist” (in the sense of definition 1 above); whether or not he is the sole producer of a commodity is unimportant and irrelevant for catallactic problems. It becomes important only if the configuration of his demand curve enables him to restrict sales and achieve a higher income at a monopoly price.38 If he learns about the inelastic demand curve after he has erroneously produced too great a stock, he must destroy or withhold part of his stock; after that, he restricts production of the commodity to the most remunerative level.

The monopoly price analysis is portrayed in the diagram in Figure 67. The basic assumption, usually only implicit, is that there is some identifiable stock, say 0A, and some identifiable market price, say, AC, which will result from competitive conditions then represents the stock line under “competition.” Then, according to the theory, if the demand curve is elastic above this price, there will be no occasion to restrict sales and obtain a higher, or “monopoly,” price. Such a demand curve is DD. On the other hand, if the demand curve is inelastic above the competitive-price point, as in D′D′, it will pay the monopolist to restrict sales to, say, 0A′(stock line represented by A′B′ ) and achieve a monopoly price, A′M. This would yield the maximum monetary income for the monopolist.39

The inelastic demand curve, 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 curve, 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 curve, as presented to the cartel, inelastic. This condition serves as the impetus to the formation of the cartels studied above.

• 36For clear expositions of the theory of monopoly price, see Mises, Socialism, pp. 385–92, and Human Action, pp. 278, 354–84; Menger, Principles of Economics, pp. 207–25; Fetter, Economic Principles, pp. 73–85, 381–85; Harry Gunnison Brown, “Competitive and Monopolistic Price-Making,” Quarterly Journal of Economics, XXII (1908), pp. 626–39; and Wieser, Social Economics, pp. 204, 211–12. In this particular case, “neoclassical” includes “Austrian.”
• 37Mises, Human Action, p. 278.
• 38Thus:
  The mere existence of monopoly does not mean anything. The publisher of a copyright book is a monopolist. But he may not be able to sell a single copy, no matter how low the price he asks. Not every price at which a monopolist sells a monopolized commodity is a monopoly price. Monopoly prices are only prices at which it is more advantageous for the monopolist to restrict the total amount to be sold than to expand sales to the limit which a competitive market would allow. (Mises, Human Action, p. 356)
• 39Here we abstract from monetary expense or “money cost” considerations. When the producer is considering sale of already produced stock, such past monetary expenses are completely irrelevant. When he is considering present and future production for future sale, present money-cost considerations become important, and the producer strives for maximum net returns. At any rate, some A′point will be set, whatever the actual configuration of money costs, unless, indeed, average money costs are falling rapidly enough in this region to make the “competitive point” the most remunerative after all. It is curious that it is precisely the condition of falling average cost that has given the most worry to anti-monopoly writers, who have been concerned that one given firm in any industry might grow to “monopoly” size because of this condition. And yet, if it is “monopoly price,” not monopoly, that is particularly important, such worry is clearly unfounded. On the general unimportance of cost considerations in monopoly theory, see Chamberlin, Theory of Monopolistic Competition, pp. 193–94.

Up to this point we have explained the neoclassical theory of monopoly price and have pointed out various misconceptions about its consequences. We have also shown that there is nothing bad about monopoly price and that it constitutes no infringement on any legitimate interpretation of individuals’ sovereignty or even of consumers’ 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.53 If we turn to the definition of monopoly price on page 672 above, or the diagrammatic interpretation in Figure 67, 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 curve as it is presented to the firm over a certain range. Let us say that the firm finds itself with a certain demand curve (Figure 68).

The producer must decide how much of the good to produce and sell in a future period, i.e., at the time when this demand curve 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, i.e., 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, say 0S. Assuming that he has correctly estimated his demand curve, the intersection of the two will establish the market-equilibrium price, 0P or SA.

The critical question is this: Is the market price, 0P, 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 established somewhere, and which we may compare 0P with. Neither does the elasticity of the demand curve establish any criterion. Even if all the difficulties of discovering and identifying the demand curve were waived (and this identifying can be done, of course, only by the producer himself—and only in a tentative fashion), we have seen that the price, if accurately estimated, will always be set by the seller so that the range above the market price will be elastic. How is anyone, including the producer himself, to know whether or not this market price is competitive or monopoly?

Suppose that, after having produced 0S, 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 curve 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 less in the next period, this is all that can be said about the action. For there is no criterion that will determine whether or not he is moving from a price below the alleged “competitive price” or moving above this price. Thus, we cannot use “restriction of production” as the test of monopoly vs. competitive price. A movement from a subcompetitive 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 consumers’ 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 firm. 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 ability. 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 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 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 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. Mickey 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 Doakes 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 any more 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” (i.e., 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 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, since 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 above, 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 be applied to a monopolized labor factor. What labor factor earns a zero wage in a competitive market? Yet many monopolized (definition 1) 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 submarginal 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. But 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.54

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 below, there can be no such thing as “pure competition,” that hypothetical state in which the demand curve 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, i.e., the revenue that a given increment of cost will yield to the firm. (Only if the demand curve 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 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 above, 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 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 subcompetitive price.

Furthermore, we have seen that there is no essential difference between a cartel and a 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 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 between a cartel, a merger, and one larger firm.

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 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 our analysis of the direction of action. But here, all that we know from prior analysis of human action is that individuals co-operate 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 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 nonrestrictive 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 1). 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.”

• 53We have found in the literature only one hint of the discovery of this illusion: Scoville and Sargent, Fact and Fancy in the T.N.E.C. Monographs, p. 302. See also Bradford B. Smith, “Monopoly and Competition,” Ideas on Liberty, No. 3, November, 1955, pp. 66 ff.
• 54In 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.”