Monopoly-Prices Large Production 1

MONOPOLY-PRICES; LARGE PRODUCTION 1. Tests of monopoly control. § 2. Uniform monopoly-price in rela tion to costs. § 3. General principle of uniform monopoly-price and cost. § 4. Temporary and limited monopoly and discrimination. § 5. Theory of discriminatory monopoly-prices. § 8. Problem of the economy of large production. 7. Economy of labor in large production. § 8. Economical use of machinery in large production. § 9. Economy of buy ing and selling in large quantities. § 10. Certain limitations of large production. § 11. Certain disadvantages of large buying and selling. § 12. Large production and the two types of prices. § 13. Monopoly element in price-fixing.

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1. Tests of monopoly control. The essential condition that distinguishes monopoly from competition is the buyer's lack of the power of substitution of one seller for another. The test of the degree of monopoly control is the seller's power to continue raising prices without thereby driving enough buyers to other goods or to other sellers to prevent his making some net profit by raising the price. A seller is competitive when he must take the general market-price as a fixed fact, and can decide only whether and how much to sell at that price. A seller is a monopolist when he represents such a large proportion of the offers that he may withhold a part, raise the market-price, and make a larger profit on the smaller sale. The competitive seller makes his profit by selling all he can at the market-price ; the monopolist makes his profit by selling less and altering the whole price equilibrium.

Ownership of an important fraction of an entire species of goods may give some power to affect price. If the control is slight, a very small rise of price will bring in competitors.

381 The monopoly profits in this case either must be very small or they will be very brief. Those outside, controlling a large supply, will be tempted by large profits to market it at once and to increase it as fast as possible. One owning a large part of the desirable building sites or houses in a town may gain by occasionally letting one stand vacant in order to drive better bargains with tenants. A trade-union, controlling most of the labor supply of one kind in a town, may gain as a whole by keeping some of their members unemployed at times.

But the test of monopoly is that a gain results from a higher price and fewer sales. It begins at the point where there is a motive to limit the supply in accordance with the paradox of value. The control of an entire species of goods gives price-fixing power limited only by substitution of goods. Even tho one person controlled all the coal in any market, its price still would be limited by the substitution of wood, oil, etc. If there were but one possible source of meat supply, most people could live without meat, but if one person owned all food of every kind, control of price would be as complete as is conceivable. The monopolist would be the absolute despot of the lives of his fellows. The monopoly of great species of goods can thus be seen gradually to merge from one grade into another. Monopoly is a matter of quality as well as quantity. There is more or less of it in the different industries, and it varies over time and territory. The monop olist aims, just as the competitor does, to get the price that gives the maximum gain. The monopolist, however, is in a more or less favored position, as he can raise his price and yet retain enough of his customers to gain by the change.

§ 2. Uniform monopoly-price in relation to costs. Now the monopolist also in his sales is limited by cost, but not so often or in such a compelling way as is the competitive seller. Within the range of his monopoly power he may either sell his whole product at a price well above cost plus a profit or he may discriminate more successfully than can the seller ex posed to competition, and thus sell all but a small part of his product at a wide margin of profit. Let us see how monopoly price-fixing is affected by cost. The crude monopoly-price (see above, Chapter 8), is that which yields the largest total selling price (this giving the largest profit) only when cost is zero.' The highest uniform price which it is to the interest of a monopoly to charge is that which yields the largest profit ; that is, the largest difference between total price and total • In each case the line marked a is the level of monopoly-price, and b that of competitive price on the assumption that one unit is a fair competitive profit ("fair" meaning enough to give a motive to enter prise).