<h2>CHAPTER 33</h2>
<h3>MONOPOLY PROFITS</h3>
<h4>§ I. NATURE OF MONOPOLY</h4>
<div class="sidenote">Difficulty of fixing the meaning of monopoly</div>
<p>1. <i>The term monopoly is used loosely and in many senses.</i> In popular
discussion monopoly means almost any wealthy corporation or the power
the corporation possesses, a power which is usually thought of as
oppressive. Even economists have held the vaguest ideas regarding
monopoly. The recent rise of trusts and monopolies has given a large new
body of facts bearing upon the subject, but all the resulting discussion
by the public and by economists has not brought agreement upon a
definition entirely satisfactory. When usage has not settled upon any
one meaning, the selection of a definition is in a measure arbitrary,
though it may be guided by logic and considerations of expediency. Let
us state the various meanings and indicate the one adopted in this
discussion.</p>
<div class="sidenote">Monopoly is not merely scarcity</div>
<p>2. <i>Monopoly should not be used as synonymous with scarcity.</i> Scarcity
is the essential condition of all value. The simplest things—bricks,
sand, the commonest unskilled labor—would have no value were there not
a degree of scarcity relative to the wants that may be gratified.
"Monopoly," whatever else it means, always conveys the idea of some
exceptional kind of scarcity, scarcity due in part to some source or
cause not ordinarily present. It is a bad practice in definition to
apply two words to one idea, leaving the other idea unnamed, as is done
when monopoly is made synonymous with scarcity. Both words are needed.
Such a<span class="pagenum"><SPAN name="Page_303" id="Page_303">[Pg 303]</SPAN></span> usage unfortunately is common in economic literature. Many
economic writers, for example, have called landownership monopoly,
saying that land being the work of nature cannot be increased by men,
and therefore must always be scarce. Even if it were true that in the
economic sense land could be produced by man, there still would be
confusion here between a general class of goods and a special thing. The
fact that a particular field cannot be duplicated does not make a
monopoly of land as a whole, any more than the existence of desert land
in Arizona makes land valueless or a free good. Nor is a land-owner a
monopolist any more than is the owner of a valuable machine. The owner
of forty acres of land worth four hundred dollars, or the owner of a
village lot worth a hundred dollars, can hardly be called a monopolist.
It leads to absurdity to use the word monopoly with reference to
landownership indiscriminately. Neither mere scarcity nor the limitation
of natural stores should be called monopoly when ownership is scattered
and combination between owners does not exist.</p>
<div class="sidenote">Monopoly is not merely superior economic power</div>
<p>3. <i>The ability of superior material agents and of skilled workers to
secure higher returns than do poor ones does not constitute monopoly.</i>
The free competition assumed in abstract discussions of value, does not
mean equal capacity or efficiency, but the legal freedom and personal
willingness to move a productive agent into the highest industrial place
it is capable of holding. The rocky field does not compete with the
fertile one in the sense that it can yield the same uses. The field fit
only for potatoes does not compete with those rare and favored
localities that can raise the best wines. The gardener earning two
dollars a day does not compete with the skilled physician with an income
of twenty thousand dollars a year, for he has not the economic capacity
to do so; but he is <i>free</i> to compete (as is the owner of the rocky
field) unless law, caste, class legislation, social prejudice, or some
other objective factor forbids. Anything, however, that prevents the
labor or capital of<span class="pagenum"><SPAN name="Page_304" id="Page_304">[Pg 304]</SPAN></span> buyers or sellers from application for which they
are fitted, defeats free competition. To use the term monopoly of any
and every limitation of economic ability is to extend it to every case
of value. To use it of the high wages of skilled workmen, where no union
to suppress competition exists among them, is to make it a colorless
synonym of scarcity. It should be confined to a narrower and more
exclusive use. Some special kinds of limitation should be connected with
the idea of monopoly.</p>
<div class="sidenote">Monopoly consists in unified control</div>
<p>4. <i>The limitation connected with monopoly is not that of economic
capacity but that of ownership and control.</i> The derivation of the word
from the Greek points to the general thought: <i>monos</i>, alone, <i>poléo</i>,
to sell, a single seller, the sole source of supply in a given market.
The term was first used in England of special grants or patents of
monopoly from the crown to make or deal in specified articles, such as
soap, candles, etc. The political power of the state created and
defended the monopoly. This policy is pursued in a limited degree to-day
for the encouragement of invention, in the granting of patents and
copyrights. In the current definition, "The exclusive right, power, or
privilege of dealing in some article or trading in some market," the
term "dealing in" is well chosen, for it is broad enough to cover cases
of buying as well as selling, and includes power derived from political
as well as from other sources. But the term "exclusive" is too absolute,
allows of no gradations, and makes the definition applicable only in the
rarest cases.</p>
<div class="sidenote">Definition of monopoly</div>
<div class="sidenote">Monopoly limits supply</div>
<p>5. <i>Monopoly is such a degree of control over the supply of goods in a
given market that a net gain will result to the seller if a portion is
withheld.</i> Every producer has control over some agents and some portion
of the supply of products; but ordinarily the portion controlled by any
one is so small that withholding it entirely from sale would not cause
the market price to rise in any appreciable degree. The producer in such
a case regulates his action as if the market price were fixed beyond his
control, and he uses his productive<span class="pagenum"><SPAN name="Page_305" id="Page_305">[Pg 305]</SPAN></span> agents fully up to the point where
costs equal price on the marginal unit of product. A skilled worker
getting five dollars a day loses that sum every day he is idle. A
landowner whose land can command a competitive rent of ten dollars an
acre must take that sum or less, or nothing; he cannot get more. How can
a net gain ever result from a smaller sale? As a reduction of supply
results in a higher price, it is possible, as is seen in the paradox of
value, for a situation to arise in the case of some goods, where a
smaller number of units yield a larger sum in the market than a larger
number of units. But the seller's interest lies not in the increase of
total sales, but in that of net gains. Net gains, being the product of
the number of units sold multiplied by the gain on each unit, increase
at a much faster rate than do total sales. The existence of monopoly
power in any degree depends therefore on several factors: the effect of
contraction of supply in raising prices, the effect on costs, the number
of units remaining in the ownership of the one contracting supply, and
the possibility of preventing others from increasing supply later to
profit by the higher prices.</p>
<h4>§ II. KINDS OF MONOPOLY</h4>
<div class="sidenote">The sources of monopoly power</div>
<div class="sidenote">Political monopoly</div>
<p>1. <i>Monopoly gets its power from political, economic, and commercial
sources.</i> A political monopoly derives its power of control from a
special grant from the government, forbidding others to engage in that
business. The typical political monopoly is that conferred by a crown
patent bestowing the exclusive right to carry on a certain business. A
second kind is that conferred by a patent for invention, or the
copyright on books, the object of which is to stimulate invention,
research, and writing by giving the full control and protection of the
government to the inventor and writer or their assignees. In this case
the privilege is socially earned by the monopolist; it is not gotten for
nothing. Moreover, the patent is limited in time, expires and becomes a
social possession.<span class="pagenum"><SPAN name="Page_306" id="Page_306">[Pg 306]</SPAN></span> A third kind is a government monopoly for purposes
of revenue. In France, the government controls the tobacco trade, and
the high price charged for tobacco makes the monopoly yield a large
income. A fourth kind are public franchises for public service, as
street-railways, lights, gas, waterworks, etc. These are granted to
private capitalists to induce them to invest capital in something which
has public utility.</p>
<div class="sidenote">Economic monopoly</div>
<p>Economic monopoly arises when the ownership of scarce natural agents, as
mines, land, water-power, comes under the control of one man or one
group of men who agree on a price. Economic monopoly is a result of
private property that is undesigned by the government or by society. It
is exceptional, considering the whole range of private property, but it
is important. The oil-wells embracing the main sources of the world's
supply have come under one control. One corporation may control so many
of the richest iron-mines of the country as to be able to fix a price
different from that which would result under competition. Coal-mines,
especially those of some peculiar and limited kind, such as anthracite,
appear to become easily an object of monopolization. Economic monopoly
merges into political monopolies, such as patents and franchises.
Private property is a political institution designed to further social
welfare, and only rarely is any particular property a monopoly. Private
control of great natural resources doubtless would have been prohibited
had it been foreseen.</p>
<div class="sidenote">Commercial monopoly</div>
<p>Commercial monopoly, variously called contractual, organized, or
capitalistic monopoly, arises where men unite their wealth to control a
market, to overpower or intimidate opposition, and to keep out or limit
competition by the mere magnitude of their wealth. These various kinds
so merge into each other that they cannot always be distinguished in
practice. A patent may help a capitalistic monopoly in getting control
of a market; great wealth may enable a company to get control of rare
natural resources.</p>
<p><span class="pagenum"><SPAN name="Page_307" id="Page_307">[Pg 307]</SPAN></span></p>
<div class="sidenote">Special classes of monopoly</div>
<p>2. <i>Monopolies may, for special purposes, be classified also as selling
and buying, producing and trading, lasting and temporary, general and
local.</i> The terms selling and buying monopoly explain themselves, though
the latter conflicts with the etymology. Under conditions of barter the
selling and the buying monopoly would be the same thing in two aspects.
A selling monopoly is by far the more common, but a buying monopoly may
be connected with it. A large oil-refining corporation that sells most
of the product may by various methods succeed in driving out the
competitors who would buy the crude oil. It thus becomes practically the
only outlet for the oil product, and the owners of the land thus must
share their ownership with the buying monopoly by accepting, within
certain limits, the price it fixes. The Hudson Bay Company, dealing in
furs, had practically this sort of power in North America. Many
instances can be found, yet, relatively to the selling monopolies, those
of the buying kind are rare. A producing monopoly is one controlling the
manufacture or the source of supply of an article; a trading monopoly is
one controlling the avenues of commerce between the source and the
consumers. Monopolies are lasting or temporary, according to the
duration of control. By far the larger number are of the temporary sort,
because high prices strongly stimulate efforts to develop other sources
of supply. Yet the average profits of a monopoly may be large throughout
a succession of periods of high and low prices. Monopolies are general
or local, according to the extent of territory where their power is
felt. At its maximum where transportation and other costs most
effectually shut out competition, monopoly power shades off to zero on
the border-line of competitive territory.</p>
<div class="sidenote">Relativity of monopoly</div>
<div class="sidenote">The test of monopoly</div>
<p>3. <i>Degrees of power to affect price result from varying extent of
control; monopoly is a relative term.</i> The term monopoly by its
derivation has reference to a single seller; but there are other
thoughts in the concept. Monopoly has reference also to the amount of
the supply controlled. The<span class="pagenum"><SPAN name="Page_308" id="Page_308">[Pg 308]</SPAN></span> frequent use of the adjectives partial,
limited, and virtual are implied but usually superfluous recognitions of
the relative character of monopoly. Ownership of a particular knife,
pencil, book, makes one the unique seller of it, but confers no monopoly
power, as the power of substitution is practically absolute; the welfare
of no one depends in any appreciable measure on that particular pencil.
Ownership of an important fraction of an entire species of goods gives
more power to affect value. One owning a large part of the desirable
building sites or houses in town may gain by occasionally letting one
stand vacant in order to drive better bargains with tenants. A
trade-union may control most of the labor-supply of one kind in a town.
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 though one person controlled all the coal and wood in any
market, their prices still would be limited. If there were but one
possible source of meat-supply, most people could live without meat. The
monopoly of great species of goods can thus be seen gradually to merge
from one grade into another. It is a matter of quality as well as
quantity. There is more or less of it in the different industries, and,
as noted in the preceding paragraph, it varies over time and territory.</p>
<h4>§ III. THE FIXING OF A MONOPOLY PRICE</h4>
<div class="sidenote">Forces governing competitive prices</div>
<p>1. <i>A competitive producer gets the highest price that will permit him
to dispose of his product.</i> The enterpriser seeks to get the highest
price for his product that the market will afford. His ability to
continue making a profit at a lower price does not induce him to reduce
the price unless the reduction is to his interest. The ordinary
competing manufacturer is limited in his price by two things: first,<span class="pagenum"><SPAN name="Page_309" id="Page_309">[Pg 309]</SPAN></span>
his customers may cease to buy such articles entirely and may substitute
other goods if the price is too high; secondly, they may buy of other
sellers. Between his wish to keep the price up, and the customer's wish
to buy as cheaply as he can, the price is fixed at a point where there
is no inducement for others to come in and reduce his sales, or for him
to seek a better market. There may be under these conditions a potential
but very limited monopoly power. The sole druggist in a small town might
occasionally get extortionate prices from particular customers in times
of dire need, but he would thus drive away much of his custom, and would
tempt a fairer and less grasping competitor to come in. Thus, when men
and capital are free to come and go, there results an average or normal
return for ability and agents of a certain grade. Prices come to
equilibrium where each is selling his total product.</p>
<div class="sidenote">Monopoly's greater control of price</div>
<p>2. <i>Where a monopoly exists to a greater or less degree, there is less
reason to fear loss of custom to competitors.</i> The degree of control
determines the fear of competitors. If the control is slight, a very
small rise of price will bring in competitors. 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. Even where a
large part of the supply is under one control, the fear of substitution
puts a limit on the price demanded. If the control were extended to all
wealth, the monopolist would be the absolute despot of the lives of his
fellows. But as things are, the monopolist 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 considerably before losing the most of his customers. Much depends
on whether the costs increase or decrease as output grows. Where a large
increase in output greatly decreases the cost, lower price may leave a
larger margin between the cost and the selling price. A<span class="pagenum"><SPAN name="Page_310" id="Page_310">[Pg 310]</SPAN></span> general
monopoly price is therefore not an unlimited price. It is higher than
the competitive price if the same cost of production is maintained. It
may conceivably be lower than the former competitive price if the
economies of combination greatly reduce the cost and justify a large
increase of the output.</p>
<div class="sidenote">Discriminating monopoly rates</div>
<p>3. <i>A monopoly often seeks to avoid a general market price, and it
adjusts its charge in each small market separately.</i> This is a most
important aspect of the monopoly problem and a most important
modification of the principle just stated. A market price is the
expression of the least urgent demand that aids in carrying off a given
supply. It is a maxim that there can be but one price at a time in a
given market. The baker ordinarily sells the loaf at the same price to
every one buying a given quantity. If he had a monopoly of the
bread-supply, however, he might deal with each customer separately,
ascertain, by personal inquiry into the lives of the citizens and by the
aid of a force of detectives, just how much each could or would pay
rather than do without bread. The policy of varying prices is thus
followed by monopolies, though usually in a less inquisitorial way, to
enable them to get the highest possible returns. Under the name of
"charging what the traffic will bear," it is practiced by the railroads
as local and personal discrimination. The endurance of some communities
and of some individuals being greater than that of others, the burden is
adjusted to the back, being made not as light but as heavy as each can
be forced to bear.</p>
<div class="sidenote">Low rates to destroy competitors</div>
<p>Large monopolies dealing in commodities use an adaptation of this method
to kill off small competitors who, within a certain district, sell at
less than the monopoly price. Prices are suddenly reduced in that
community below cost until, the small competitor being ruined, the
monopoly rate is reëstablished perhaps higher than before. Fear of
suffering a like fate prevents others from attempting competition even
when prices offer a great attraction and give a high monopoly profit.</p>
<p><span class="pagenum"><SPAN name="Page_311" id="Page_311">[Pg 311]</SPAN></span></p>
<div class="sidenote">The source of monopolistic profits</div>
<p>The profits of monopoly can be explained by the ordinary laws of value,
yet evidently they form a peculiar economic and social problem. They
appear to be due not to the services of the enterpriser in increasing
production, but to his success in limiting it. There is, therefore, an
antisocial element in them not found in the profits of ordinary
industry. This deserves further and closer study.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_312" id="Page_312">[Pg 312]</SPAN></span></p>
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