The Significance of Monopoly

THE SIGNIFICANCE OF MONOPOLY With monopoly, as with competition, judgment must balance potential advantages and disadvantages. The verdict may differ with the differing circumstances of different trades. It may be favorable for specific trades; adverse for the economy as a whole.

The Advantages of Monopoly

There are but a few areas in which it is clear that the public interest can be better served by monopoly than by competition. In the natural resource industries, the need for conservation suggests the desirability of noncompetitive exploitation. In certain other fields, as in the telephone business, the nature of the function performed is such as to demand coordinated development under common control. In still others, as in the case of the railroad industry during the first World War, the adequacy of the service rendered may be improved by unification. It is possible, too, that there are fields in which the technology of production is such that the most efficient scale of operation can be attained only if a single firm is permitted to produce the whole supply. But such fields cannot be numerous. Realization of the economies of large scale production seldom requires monopolistic control. The efficiency of size has to do with the scale of production, marketing, and financing operations, not with the extent of control over supply in a market. It is probable that the demand for the vast majority of products is sufficiently great to enable a large number of plants, each under separate ownership, to realize the economies of size.

The advantages of monopoly, in general, are the converse of the disadvantages of competition. Monopoly can avoid wasteful duplication of productive facilities. It can simplify and standardize its products. It can minimize expenditure on advertising and salesmanship. It can command essential information and cut the cost of bargaining and negotiation. It need not shroud its technology in secrecy; it can apply the discoveries resulting from research to the entire output of a trade. The

monopolist is under no competitive pressure to give short measure or to adulterate his goods. He is not driven to depress the standards of labor. If he wishes, he can so conduct his business as to serve the common interest. But, in the absence of effective public regulation, he is under no compulsion to do so.

Monopoly may afford the investor greater security and a steadier return than he could obtain under competition. It is designed to prolong the life of the business unit. It is likely to sacrifice progress to stability.

It need not go through a continuous cycle of bankruptcy induced by bankruptcy. But monopoly does not invariably serve the interest of the investor. Its formation and its preservation frequently involve the acquisition of extensive properties at an excessive price. Its prospective profits are often so highly capitalized as to yield the purchaser of its securities a small and uncertain return. Its price policy is likely to be one that obstructs adaptation to economic change and thus imperils investment both in monopolized and in competitive fields. Under monopoly, as under competition, the investor must run the risk of incompetent or dishonest management and loss of markets through shifts in consumer demand.

The Disadvantages of Monopoly

The counts in the indictment of monopoly are ten in number: First, it causes an uneconomic allocation of productive resources. The monopolist limits his output to the quantity that the market will take at the established price. Consumers who would be willing to purchase larger quantities of his product at lower prices are forced, instead, to buy goods that are wanted less. Capital and labor are thus diverted from those things which the community prefers to those which are, at best, a second choice. The resources that are excluded from the superior occupation compete with others for employment in inferior ones and their productivity declines.