Monopolistic Practices

(b) The theory of simple and discriminating monopoly teaches that, excepting a limiting case, monopoly price is higher and monopoly output smaller than competitive price and competitive output. This is true provided that the method and organization of production—and everything else—are exactly the same in both cases. Actually however there are superior methods available to the monopolist which either are not dawn to the effect that even though some pressure can be exerted on them in the short run, long-run developments might eventually destroy practically all that was left on the lists.

available at all to a crowd of competitors or are not available to them so readily: for there are advantages which, though not strictly unattainable on the competitive level of enterprise, are as a matter of fact secured only on the monopoly level, for instance, because monopolization may increase the sphere of influence of the better, and decrease the sphere of influence of the inferior, brains, 19 or because the monopoly enjoys a disproportionately higher financial standing. Whenever this is so, then that proposition is no longer true. In other words, this element of the case for competition may fail completely because monopoly prices are not necessarily higher or monopoly outputs smaller than competitive prices and outputs would be at the levels of productive and organizational efficiency that are within the reach of the type of firm compatible with the competitive hypothesis.

There cannot be any reasonable doubt that under the conditions of our epoch such superiority is as a matter of fact the outstanding feature of the typical large-scale unit of control, though mere size is neither necessary nor sufficient for it. These units not only arise in the process of creative destruction and function in a way entirely different from the static schema, but in many cases of decisive importance they provide the necessary form for the achievement. They largely create what they exploit. Hence the usual conclusion about their influence on long-run output would be invalid even if they were genuine monopolies in the technical sense of the term.

Motivation is quite immaterial. Even if the opportunity to set monopolist prices were the sole object, the pressure of the improved methods or of a huge apparatus would in general tend to shift the point of the monopolist’s optimum toward or beyond the competitive cost price in the above sense, thus doing the work—partly, wholly, or more than wholly—of the competitive mechanism,20 even if restriction is practiced and excess capacity 19 The reader should observe that while, as a broad rule, that particular type of superiority is simply indisputable, the inferior brains, especially if their owners are entirely eliminated, are not likely to admit it and that the public’s and the recording economists’ hearts go out to them and not to the others. This may have something to do with a tendency to discount the cost or quality advantages of quasi-monopolist combination that is at present as pronounced as was the exaggeration of them in the typical prospectus or announcement of sponsors of such combinations.

20 The Aluminum Company of America is not a monopoly in the technical sense as defined above, among other reasons because it had to build up its demand schedule, which fact suffices to exclude a behavior conforming to the Cournot-Marshall schema. But most economists call it so and in the dearth of genuine cases we will for the purposes of this note do the same. From 1890 to 1929 the price of the basic product of this single seller fell to about 12 per cent or, correcting for the change in price level (B.L.S. index of wholesale prices), to about 8.8 per cent. Output rose from 30 metric tons to 103,400. Protection by patent ceased in 1909.

Argument from costs and profits in criticism of this “monopoly” must is in evidence all along. Of course if the methods of production, organization and so on are not improved by or in connection with monopolization as is the case with an ordinary cartel, the classical theorem about monopoly price and output comes into its own again. 21 So does another popular idea, viz., that monopolization has a soporific effect. For this, too, it is not difficult to find examples. But no general theory should be built upon it. For, especially in manufacturing industry, a monopoly position is in general no cushion to sleep on. As it can be gained, so it can be retained only by alertness and energy. What soporific influence there is in modern business is due to another cause that will be mentioned later.

(c) In the short run, genuine monopoly positions or positions approximating monopoly are much more frequent. The grocer in a village on the Ohio may be a true monopolist for hours or even days during an inundation. Every successful corner may spell monopoly for the moment.

A firm specializing in paper labels for beer bottles may be so circumstanced—potential competitors realizing that what seem to be good profits would be immediately destroyed by their entering the field—that it can move at pleasure on a moderate but still finite stretch of the demand curve, at least until the metal label smashes that demand curve to pieces. New methods of production or new commodities, especially the latter, do not per se confer monopoly, even if used or produced by a single firm. The product of the new method has to compete with the products of the old ones and the new commodity has to be introduced, i.e., its demand schedule has to be built up. As a rule neither patents nor monopolistic practices avail against that. But they may in cases of spectacular superiority of the new device, particularly if it can be leased like shoe machinery; or in cases of new commodities, the permanent demand schedule for which has been established before the patent has expired.

Thus there an element of genuine monopoly gain in those entrepreneurial profits which are the prizes offered by capitalist society to the successful innovator. But the quantitative importance of that clement, its volatile nature and its function in the process in which it emerges put it in a class by itself. The main value to a concern of a single seller position that is secured by patent or monopolistic strategy does not consist so much in the opportunity to behave temporarily take it for granted that a multitude of competing firms would have been about equally successful in cost-reducing research, in the economical development of the productive apparatus, in teaching new uses for the product and in avoiding wasteful breakdowns. This is, in fact, being assumed by criticism of this kind, i.e., the propelling factor of modern capitalism is being assumed away.

according to the monopolist schema, as in the protection it affords against temporary disorganization of the market and the space it secures for long- range planning. Here however the argument merges into the analysis submitted before.