1. The Nature of Monopoly and its Significance for the Formation of Prices

No other part of economic theory has been so much misunderstood as the theory of monopoly. The mere mention of the word monopoly usually stirs up emotions which make clear judgment impossible and provokes, instead of economic arguments, the usual moral indignation evinced in etatistic and other anti-capitalist literature. Even in the United States the controversy raging over the trust problem has supplanted all impartial discussion of the problem of monopoly.

The widespread view that the monopolist can fix prices at will, that — in common phrase — he can dictate prices, is as erroneous as the conclusion, derived from this view, that he has in his hands the power to do whatever he likes. This could only be the case if the commodity monopolized were, by its very essence, completely outside the range of other goods. A man who could monopolize the atmosphere or drinking water could undoubtedly force all other human beings to obey him blindly. Such a monopoly would be unhampered by any competing economic agency. The monopolist would be able to dispose freely of the lives and property of his fellow-men. Such monopolies, however, do not come under our theory of monopoly. Water and air are free goods, and where they are not free — as in the case of water on a mountain top — one can evade the effect of monopoly by moving to a different place. Perhaps the nearest approach to such a monopoly was the power to administer grace to believers, exercised by the medieval Church. Excommunication and interdict were no less terrible than death from thirst or suffocation. In a socialist community the State as organized society would form such a monopoly. All economic goods would be united in its hands and it would therefore be in a position to force the citizen to fulfil its commands, would in fact confront the individual with a choice between obedience and starvation.

The only monopolies which concern us here are trade monopolies. They affect only economic goods which, however important and indispensable they may seem, do not of themselves exert any decisive power over human life. When a commodity of which a definite minimum is essential to everyone who wishes to go on living, falls under a monopoly, then indeed do all those consequences popularly assigned to monopolies inevitably follow. But we need not discuss this hypothesis. It is of no practical importance as it lies outside the range of economics, and therefore of price theory — except in the case of strikes in certain enterprises.1  A distinction between goods which are essential to life and those which are not, is sometimes made when the effects of monopoly are being considered. But these supposedly indispensable commodities are, strictly speaking, not what they seem. As the whole argument is based on the strict concept indispensability, we have first of all to consider whether we have to deal with indispensability in the exact and full meaning of the word. Actually we can dispense with the commodities in question, either by renouncing the services we obtain from them or by procuring those services from some alternative commodity. Bread is certainly an important commodity. Yet one can live without it, by living on potatoes, cakes made from maize, and so on. Coal, so important to-day that it might be called the bread of industry, is not, in the strict sense of the word, indispensable, for power and heat can be produced without coal too. And this is all that matters. The concept ‘monopoly’ which alone concerns us here is that contained in the theory of price monopoly and is the only one which contributes materially to an understanding of economic conditions; it does not demand that a monopolized commodity shall be indispensable, unique, and without substitute. It assumes only the absence of perfect competition on the side of supply.2

Such loose concepts of monopoly are, moreover, not merely inappropriate; they are also theoretically misleading. They lead to the supposition that price phenomena can be explained without further investigation by demonstrating a monopolistic condition. Having once laid it down that the monopolist ‘dictates’ prices, that his attempt to raise prices as high as possible could only be restrained by a ‘power’ influencing the market from outside, such theorists proceed to render the concept of monopoly so elastic as to include all commodities not increasable or only increasable with increasing costs. As this already comprises most price phenomena, they are able to avoid the necessity of working out a theory of prices themselves. As a result many come to speak of the monopoly ownership of land and believe that they have solved the problem of rent by pointing out that this monopolistic relation exists. Others go further and seek to explain interest, profit, and even wages as monopoly prices and monopoly profits. Quite apart from other defects in these ‘explanations’, their authors fail to perceive that, while alleging that a monopoly exists, they say nothing at all about the nature of price formation and that therefore the catchword monopoly is no substitute for a properly developed theory of prices.3

The laws determining monopoly prices are the same as those which determine other prices. The monopolist cannot ask any price he fancies. The price offers with which he enters the market influence the attitude of the buyers. Demand expands or contracts according to the price he demands, and he has to reckon with this like any other seller. The one and only peculiarity of monopoly is that, assuming a certain shape for the demand curve, the maximum net profit lies at a higher price than would have been the case in competition between sellers.4  If we assume these conditions and if the monopolist cannot so discriminate as to exploit the purchasing power of each class of buyers, it pays him better to sell at the higher monopoly price than at the lower competitive price, even though sales are thereby diminished. Therefore, monopoly under such conditions has three results: the market price is higher, the profit is greater, both the quantity sold and the consumption are smaller than they would have been under free competition.

The last of these results must be examined more closely. If there is more of the monopolized commodity than can be placed at the monopoly price the monopolist must lock up or destroy so many surplus units that the remainder may attain the price needed. Thus the Dutch East India Company, which monopolized the European coffee market in the seventeenth century, destroyed some of its stocks. Other monopolists have done likewise: the Greek Government, for instance, destroyed currants in order to raise the price. Economically only one verdict on these proceedings is possible: they diminish the stock of wealth which serves to satisfy needs, they reduce welfare, they diminish riches. That goods which could have satisfied wants, and foodstuffs which could have stilled the hunger of the many, should be destroyed is a state of things which the outraged populace and the discerning economist unite, for once, in condemning.

Even in monopolistic undertakings, however, destruction of economic goods is rare. The far-sighted monopolist does not produce goods for the incinerator. If he wishes to place fewer goods on the market he takes steps to reduce his output. The problem of monopoly must be considered, not from the point of view of goods destroyed, but from that of production restricted.

• 1See p. 483 of this work.
• 2As there cannot be any question here of giving a theory of monopoly price, the monopoly of supply alone is examined.
• 3Ely, Monopolies and Trusts, New York 1900, p. 11 et seq. – Vogelstein (Die finanzielle Organisation der kapitalistischen Industrie und die Monopolbildungen, op. cit., p. 231) too, and following him the German Socialization Commission (op. cit., p. 31 et seq.), start from a concept of monopoly which comes very close to the views criticized by Ely and generally abandoned by the price theory of modern science.
• 4Carl Menger, Grundsätze der Volkswirtschaftslehre, Wien 1871, p. 195, further Forchheimer, Theoretisches zum unvollständigen Monopole (Schmoller’s Jahrbuch XXXII) p. 3 et seq.