!
niver si t
y
o
f C i n c i n n a ti S t u di e s
i
i
Com
e
t
t
e
v
p
A cri ti ci s m
d Monopoly Pr ice
an
curr e n t theor y w i th
s peci al re fe re n ce to i ts b e ar
ing upo n th e t rus t pro ble m
of
'
9!
FR EDER IC K CHA R LES H IC KS
mnthly
Iss ued B i-
o
,
mth
fr o
e
! NIVE R S ITY PRE S S , CINCINNATI , OH IO
7
0
hted
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1 91 I
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by
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CONTENTS
PA GE
I
.
II
.
111
.
IV
.
TH E BA S I S
T H E C ! R R E NT
H ow
P R ESE NT T R ! ST P O L ICY
OF T H E
P R ICES
TH E O R Y
ARE
OF
PR I CE
,
12
,
D E TE R M I N E D ,
T R ! S T P O L IC Y F A IR
To TH E C O N S ! M E R
A
,
To
B IG B ! S INESS
21
A ND
32
i
i
t
e
Com
e
t
v
p
d Monopoly Pr ice
an
I
TH E
BA SI S
O F TH E P RE SE NT T R! ST
PO L I CY
pre sent t r ust policy o f the United State s is an
att empt to destroy monopoly and thereby l eave th e field
to competitive industry This policy finds expression
in the anti trust laws of the Unit ed States and of the
s everal States ; in their j udici al interpretation ; in the
dem and that thes e laws be more rigorously enforce d ;
and in vari ou s propo s als to amend the laws s o as th e more
surely to accomplish their purpo se wherever in their
present form they ar e in
adequ ate to the annihil ation o f
monopoly
M any illustration s might be given to exemplify this
policy O ne will however suffice for the present pur
po se The Anti T r ust l aw o f the United States declare s
th at :
Every contract combination in the form of
trust or otherwise or conspiracy in restraint of
t rade or comme rce among the several states
or with for eign nations is hereby declared to
be illegal
Every person who shall monopolize or at
tempt to monopolize or combine o r conspire
TH E
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5
COMPETITIVE
6
MONOPOLY PR ICE
A ND
other person o r persons to monopolize
any p art of the trade or commerce among the
several st ates o r with foreign n ations sh all be
"
deemed guilty of a misdemeanor
with
any
,
,
,
1
,
This l aw h as been the subj ect of numerous court
decisions including several by the Supreme Court of
the United St ates Among the most important cases
to reach this high t ribun al w as the one known as the
Nor th er n S ecur i ti es c ase which w as decided in 1 90 3
The opinion affirming the decree of the circuit court
against the N orthern Securities C ompany w as prep ared
by the l ate M r !ustice H arl an I n this opinion after
extended reference to previous decisions o f the Cou r t
several propositions were stated as deducible from thos e
deci s ion s Am ong these propositions ar e the following :
That Congress has the power to establish
rules by which interstate and intern ational com
merce sh all be governed and by the Anti T r ust
Act h as prescribed the r ul e of fr ee com
p eti ti on
among th o se engaged in such commerce
Th at the natur al efiect of com
p eti ti on is
mer ce and an agreement whose
to i ncr eas e com
direct eff ect is to prevent this pl ay of compe
tition restrains instead of promotes trade and
commerce
Th at to viti ate a combination such as the
act o f C ongress condemns it need not be shown
that the combination in f act results or will t e
sult in a total suppression of trade or in a
onop ol y but it is only essenti al to
com
pl ete m
Show th at by its necess ary operation it tends
to restrain interstate or internation al trade or
commerce or tends to cr eate a monop ol y in such
trade or commerce and to deprive the public o f
the advantages that fl ow fr om fr ee com
p eti
,
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,
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,
!
ti on
2
.
1 26
St t
2
8 Re
!
.
a
.
.
at
L ar ge
.
po t
hp
2 0 9. c a
r s . 1 93 ,
p
ages
.
6 47
.
33 1, 332
!
.
.
mp St t 90 p 3 0 0
t i t li i ed i n th o i gi n l
8 Co
.
No
.
a c z
a
.
1
1,
e
.
r
2
a
.
.
TH E B
ASI S
OF T H
E
PR ESEN T
TR ! ST
POLI CY
Throughout the opinion num e rous ref erences ar e
m ade to the n atu ral l aws o f competition to th e ad
v ant ages arising therefrom and to th e purpo se O f th e
Act to secure the operati on o f thos e l aws Subs equent
deci s ion s containing fu r ther interpretations of the Act
have not m odified thi s fundamental attitu de towards
competition and monopoly
Th e so cal led r ule of
reason recently appli ed to the enforcement o f the l aw
h as gone no further th an to recognize th at not al l sup
pression of competition i s nece ssarily in r est raint o f
trade The intent of the l aw rem ains as before to
prevent monopoly and to secure free competition
Moreover in thi s intent th e Anti Trust l aw voices
correctly public Opinion Alth ough there i s widespread
di s satisfact ion with the results that have been attained
under it popular confidenc e in it s fundamental pu rpos e
continues undiminished
An expl anation o f thi s general att itude condemning
monopoly and approving competition i s to be found in
f air p r ice
an in tu itiv e b elief in th e d oct r i ne o f
The idea that some prices ar e f air and other s unfair
is practically univer sal Thi s idea h as existed f or cen
tu r ies perh ap s as l ong as buy ing and selling th em s el v es
have ex i sted During the M iddle Ages it w as known as
“
the doct rin e o f j u st pr ice an admirabl e descript ion of
“
which i s found in P ro f e ssor W ! A shl ey s Engl i sh
Economic Hi sto ry
At th at time it w as taught th at
in any p ar t icu lar count ry or district there i s fo r ever y
ar t icl e at any p arti cul ar time some on e j us t p r ice : th at
prices acco rdingly should not vary with momentar y
supply and demand with individual caprice or Sk ill in
the ch afl er ing of th e m arket I t i s the moral duty of
buyer and s ell er t o t ry to arrive as n early as po ssib le
“
!
Mo reover as ex per ience Sh ow ed
at this ju st p ric e
3 V l I 9 46
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COMPETITIVE
8
A ND
MONOPOLY PR ICE
that individuals could not be t rusted thus to adm
it th e
real value o f things it followed th at it w as the duty
of the proper authorities o f Stat e town or guild to step
in and dete r mine what the just and reasonable price
really
The application of such a principle to actual busine s s
transactions neces sitated a standard by which to deter
mine whether the price s at which com
m odities and serv
ices were off ered for sale w ere j ust or unj ust Such
a st and ard w as f ound f o r the producer of th at time
“
not in what would enable him to m ake a gain but
in wh at w ould per mit him to live a decent life accord
ing to the stand ard of com f ort which public opinion
!
recognized as appropri ate to his class
M oreover
it m
ay be n oted in p assing this st and ard w as not ill
ad apted to the co nditi ons then pr ev ailing when business
intercourse w as on a sm all scale the market for mo st
and the consumer and pro
articles w as a limited one
du cer as a rule de alt direct ly with each other
With the passing of years new industri al condition s
developed to which Ol d ideas and old policies were no
longer suited But there remained and still remains the
basic idea of f air price There h as come however a
new standard by which to determine f airness and a new
vi ew as to the prope r method for securing f airness
I t is perh aps too much to affirm th at the present
stand ard of f air price h as b een definitely formul ated
N or it is int ended here to enter upon a full discus
sion of this subj ect ; though in view of the controversy
“
ove r earned and un earned increments and of the
incre as ing tendency to call in th e aid of publ ic authority
to s ecu re reasonable ch arges there i s devel op ing an u r g
ent need for a thorough an alysi s of the bas is of fairne s s
with a vi ew to ar riving at a reasonable standard
,
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4 Ibid 1 40 .
.
6
Ibid
.
I 3 8.
TH E B A S
IS
OF TH E
PR E S E N T
TR
U ST POLICY
9
I n general it is probably correct to say th at in th e
eff o r ts to prevent un f air prices at the present t im e the
test applied is gain or as it i s comm only call ed p rofit s
A fair p r ice is one which yiel ds f ai r profit s !u st what
ar e f air pro fits in any par ti cul ar cas e i s not eas y t o de
t ermine but it is cer tain th at the concept of fair profit s
as a tes t o f f air prices does not m ean a definite
uni
v er sal l y applic able p er cent of som e arbitraril y sel ect e d
base Fair profits mean a fair return for those engaged
in bu sin ess due account be ing taken o f the character
of the business the capital required the risks involved
and the abil ity dem and ed of those who bec om e r e sp on s ible
for the initi ation and conduct of busines s
The absenc e of a definitely formul ated standard fo r
deter mining fairness is not a mere accident I t is due
to the prevailing view as to the method by which fair
—
nes s is to b e secured a method under which th e ques
t ion of wh at is fair may be left to take care of itself ;
f or f airness it is believed will follow as a m atter o f
Th at method
cou rse f rom the meth od of s ecuring it
i s f re e competition Wh e reas fo rmerly public authority
ex ercis ed directly up on price w as rel ied upon to in sure
j ustice to day the same end is sought by procuring the
unimpeded operation o f competition
T r ue it h as come to be recognized that there i s a
fi el d of activity in which competition i s not efl ective
Such f or example i s the case with t elephon e l ighting
and other simil ar industrie s
Here Government regul a
tion is acccepted as essential But s o f ar as th e broad
fi eld of general industry is conce rn ed publ ic opinion still
h olds to the idea that f ree competition is society s safe
a
u
n
rd
a
g
in
st
injustice
d
th
a
t
public
a
uthority
is
a
a
g
needed h ere i f at al l only to as sist in securing free
competit ion
Comp etitive price i s f air ; monopoly price
i s un f air
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,
COMPETITIVE
IO
A ND
MONOPOLY PR ICE
To this view enter tained by society in general ex
l
i
fi
em
e
d
by
the
nti
t
rust
l
w
s
bove
mentioned
n
a
a
a
e
o
c
o
p
mists lend the weight O f their authority I t must suffi ce
for the present discussion to cite but one example o f
the teaching of current economics but it is a typical
one t aken from the l atest edition of the O utline s of
Economics by P rofessor R ich ard T Ely and collabo
r ator s
Speaking of prices under competition it is said
that if we include the value of the business m an s
ser vices among the expenses of pro duction
the prices
recei ved f or the products of any particular busine s s
tend to equal the expenses of producing
,
,
-
,
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,
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,
!
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,
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’
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!
“
in di scussing j ust price it is said :
“
—
The competitive system i s to day so thoroughly
‘
accepted a s the
n atu ral economic order th at
there is as we have previously noted a deep
al com
p eti tive pr i ces
s eated convi cti on th at nor m
e
u
u
o
r
m
x
e
n
s
s
o
n
e
r
p
r
a
s
d
b
t
h
e
p
o
d
e
c
t
e
i
e
a
(
f
y
)
7
natu r al and j u s t p r i ces
This conviction i s
h owever brought f ace to face with the f act of
th e growth of a l arge industri al field in which
monopoly rather th an competition rules The
—
que stion of just price i s again a live issue as
it w as before the gr ow th of the competitive
system Public authority is frequently invoked
to insure th at the prices fixed by holders o f
municipal franches and other monopolist s ar e
j ust and reasonabl e The chi ef fu ndam
ental
tes t w hi ch our cour ts ar e abl e to app l y to th e
r eas onabl enes s of any p ar ti cul ar p r i ce is i ts con
i ty to w h at th e pr i ce w ou l d h ave b een u nder
for m
"
com
p eti tive condi ti ons
Thus it i s often asked
if a par ticular monopol y ch arge gives a more
th an no r m al retu rn upon the capital invest ed
The determination of wh at the expense of pro
du cing a par t icul ar commo dity or s er vice reall y
i s i s of ten a difficult or even impos sibl e task
6 p
7
i gi n l
N t i t li i d in th
7
L ater
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'
,
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I
,
,
I.
o
a c ze
e or
a
.
TH E B
AS I S
P R E S EN T
OF T H E
TR
U ST POLICY
I I
the
distinction
between
const
nt
v
ri
ble
a
a
n
a
d
a
(
expenses being frequently a stumbling block )
but given the general acceptance of the competi
tive system it is h ard to see what other standard
could be used !
-
,
,
,
’8
Few if any ar e satisfied with the results of our
present anti trust policy Some ar e calling for more
stringent enforcement of existing l aws ; others for amend
ments to those l aws which shall remove al l po s sible
avenues o f esc ape
especi ally those believed to be af
forded by the l atest Supreme Cou r t decisions ; while
still others ar e asking for such a modification of our
anti t r ust poli cy as sh all permit a distinction between
goo d and b ad tru sts
Wh at meanwhile is to be said of the cu rrent eco
—
nomic doctrine of competitive and monopoly price a
doctrine which is at the root of the whole m atter ?
,
,
-
.
,
-
.
,
,
,
pp 8 8 In n li pa t f th t ti (p 59) th ad is wa ned
ming th t mp titiv p i es a e in som w y n tur al
f
gai n t th
him l f p o eeds to indi t pra tical
nd igh t p i ces
u th
y t wh n th
h find i t
t nd r d fo d te mi ning th
ny p ti cul
pi
on b l n
of
h d to see wh t oth t nd d l d b e used th n it nf mi ty to what
th p i
would h ve b een und mp ti tive conditi ns
8
.
s
a
r
a
s a
“
a
e er r or o
ass u
.
1
"
r
a
r
.
e
r ce
e
a
ear
er
e a
e
er
r
a
e
r
a
ar
e
1.
1 0
s a
“
r eas
ar
er co
o
co
or
a
cou
e
e
r ea
e
e
se
r c
r
se
e ess
.
1
e re
r
e
ar
ar
"
a
o
r
a
a
ca e a
c
a
er
"
.
“
s co
!
r ce.
or
c
e
s
TH E
C!
RRE NT T H E O RY
P R I CE
OF
it is the purpose of this paper to an alyze the cur
rent theory O f price with a view to judging its validity
it is necess ary to state in this connection just what this
theory i s ; though as the subj ect is fully set for th in
numerous available treatises on economics only its s alient
features need be described here
Current theory recognizes tw o so r ts of price desig
nated respecti vely competitive price and monopoly price
C orresponding to these ar e two cl asses of business com
i
i
e
t
t
n
industries
monopolies
v
e
a
d
p
Competitive price exists when competition is free
and it equ als cost of production
By cost o f produc
tion is me ant the actual expense of producing plus wh at
may be called normal profits To avoid misunderstand
ing this may be called soci al cost of production To
th e individu al cost o f production mean s of course the
amount which he must pay for r aw m ateri als
w ages
interest on capital and such other outl ays as ar e incident
to the production and s ale of goods These expens es
AS
,
,
,
1
.
,
.
,
.
,
.
.
,
.
,
,
,
,
.
t th y in th f ll owing d ipti n t k n f om
nl ar ged b y th
i
O tli n
nd
th
b y R i h r d T E l y r vi sed
of E n m
nd All yn A Y ung pub lished b y
nd Th mas S Ad m M x 0 L o n
a uth
p ny N w Y k 90 9 E ssenti ll y imil r ill tr ation are
ill n C m
Th M m
ics
S e f
x m
ll t nd d t ati ses on E on m
pl S ligmana
afl d d b y
s
P in i pl of E n m
i
G n
l P i n i pl
P r t III Book I V l u
; nd S ag
i
nd Chap ! I D i t ib uti on
I nt od ti n t E n m
nd Pr ice
C h p V Val
1
T h e ill us
e
e
r
c
r
e
o
a
a
o
s a
o
co o
eor
a
a
cs .
cs .
s,
a
e
.
ar
e
c a
cs,
.
co o
es
uc o
of cur r en
co o
a
ac
or
ra
es
u
or
t tions
or
.
.
1
a
.
.
.
e
o
a
e
a
s
a
o
ue a
12
.
.
c
.
.
escr
re z a
.
re
a
o
e
.
e:
.
e er a
,
a
or
r
ar e
.
a
s
us
e a
.
r
e
o
c
a e
e.
es
.
'
e
e
a
s r
er
’
:
TH E
CUR R E N T T H EOR Y
OF
PR ICE
:3
deducted from the am ount rec eived f rom sales and
th e difl er ence con stitutes his p r ofits But vi ew ed f rom
the standpoint o f the consume r profits ar e th e paym ent
f or th e s ervices of the one who pro vide s the bu s in ess
ability with out which c omm o dities can no m o re be pro
duced than without labo r for whi ch w ages ar e paid
From the standpoint of society then it is proper to
al profits as a par t of c o st o f pr o
include at l east norm
duct ion
a
r
a
ust
wh
t
n
o
rm
l
pr
o
fits
s
p
o
inted
o
ut
a
a
w
a
s
e
!
2
above
can not be stated precisely as a c er tain pe r
cent or as a fix ed am ount Y et th at such a thing
as n orm al profits ex ists as a feature of cu rrent thought
is evidenced by th e not infrequent reference to profits
in some transaction s as abnorm al N ormal profit s will
of course vary with the qual ity of busine s s ability r e
quired in v arious under takings the risk involv ed and
—
other attending conditions in brie f with the character
o f the busin ess A sufficiently accurate de scripti on O f
no rm al profit s i s aff orded by the st atement that profits
may be con sider ed norm al in any industry when they
aff ord n o speci al or extr a inducem ent to enter the bu s i
ness or t o leave it
Competitive price then t ends to equal social cost of
product ion
I f it were alw ay s an easy matter for bu si
n es s men to change their intere sts and their
energies f rom one line of pro duction to another
and if capital and l abor coul d likewise be f r eely
trans ferred f rom one undertaking to another it
i s h ard to s ee how profit s in any one competitive
bu s ine ss could b e for any length of time much
highe r than in other comp etitive busines ses
M an ageri al ability l abo r and capi tal would
gr avitate always tow ard tho s e employments
ar e
,
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,
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,
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“
,
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,
2 p
.
9
.
,
CO MPET ITIVE
I4
A ND
M ONOPOLY PR I CE
wh i ch pr omi sed the gr eatest pr ofits Th e eff ect
would b e a cont inual tendency toward equal ity
o f adv ant age in di ff erent line s o f bu s ine ss
Th is
does not m ean nec essarily an equality of profits
as between individu al s in any giv en lines o f
bu s iness f or the am ount of profits depend s
l ar gely upon the skill and ente rpr is e of the in
dividual busin ess m
an
Purely com
i
i
f
e
t
v
profit
s
u
nder
condi
t
ion
s
o
bs
olut
e
t
e
a
p
‘
fluidity o f bu s ine s s ability of labo r and of
capital would thus tend to adju st themselves
according to th e abil ity o f the individu al bu s i
n es s m
I f w e includ e the val ue o f
an ;
the business m
an s s e rvices among the expenses
of production we m
ay
obviously state the
t endency which w e have described as a tendency
tow ard the equal ity of the prices rec eived for
th e product s of any par ticu l ar busin ess and the
8
expen s es o f produ cing them
.
.
,
.
,
’
,
,
,
’
,
,
,
!
.
The propos ition th at pr ice equal s social cost of pro
duction as sumes a condition of free compet ition and
it is impor tant to note what is meant by such a condi
t ion From the above descripti on of the nature and
t endency of competitive price it will be seen that com
petition is con sidered fr ee wh en capital l abor and
bu s iness ability can move with perfect freedom from
one industry t o another Thi s is o ften called a condi
tion of perfect fluidity and th e de sign ation i s a for tunate
one for ther e is involv ed an an alogy to th e t end ency of
w ater to seek the sam e level in sever al diff erent recep
tacl es which ar e so co nn ected th at the w ater can pass
f r eely f rom one to another
It w ould ho w ever be a mi stake to suppose th at thos e
w h o accept th e d oct rine o f pric e her e described believe
that produ ct ive agencie s ar e or ever can be per f ectly
flu id or th at compet ition i s even under so cal l ed com
n
f
a
i
t
h
v
c
o
ndi
t
i
o
ns
ver
b
s
olu
t
ely
e
n
i
e
e
r
e
e
t
t
O
c
o
e
p
,
.
,
,
,
.
,
,
.
,
,
-
,
,
El y . pp
.
T7 O, I 7 I
.
.
CO MPETI TIVE
I6
A ND
MONOPOLY
E
Pc
I n Sh arp contrast to competitive price i s monopoly
price or the price of a commodity produced under con
While under compet ition price
ditions of monopoly
is fixed at Soci al cost of product ion under monopoly
price is fix ed at that po int which will yiel d the largest
net return s As h as been seen social co st of product i on
means co st to the individual producer plus a nor m al
profit to him So by w ay of emph asizing the contrast
ay be said th at com
between the two so r t s of price it m
i
a
i
price
i
s
de
te
rmined
by
norm
l
profi
t
s
m
o
n
op
o
ly
t
t
v
e
e
p
price by largest profits
In dec iding at wh at price to off er his goods f or s al e
the monopoli st proc eeds upon the well known tend
ency for s ales to decrease when prices incr ease and
for s ales to increase when prices decr ease N et retu rns
ar e th e pr oduct of tw o f actor s : the profit on a unit o f
sales such as a bu shel of wheat a pai r of shoes etc
Wh en therefore a m
onop
and th e number of units sold
oli st seeks to increa se his t otal profit s by increasing
the price of his commodity he must take into account
the f act th at such an increas e in price may be expected
to re sult in a decre ase in sal e s and this in th e ultim ate
outcome m
ay r esult in decre as ing the sum t otal of his
profits On th e other h and al though lowering the price
o f his c ommodity will prob ably lead to l arger s al es the
increas e in profit s th at might be expected from such
increase in sale s m
ay be more th an ofi set by the de
cr eased rate of profit p er unit At some po int the t e
lat ion betw een rate of profit and extent of s al e s will
be such as to y ield the l argest total profit s and having
a monopoly he will s o f ar as his judgment o f condition s
enables him to do SO fix th e price at th at point
Such in bri e f i s the process by which monopo ly
price is determin ed A f ull d escription of monopoly price
,
.
,
.
,
.
,
,
.
,
-
.
,
,
,
.
.
,
,
,
,
.
,
,
.
,
,
,
,
,
,
,
.
.
,
CUR R E N T TH EOR Y
TH E
OF PR I cE
17
woul d n eces sitate some modification of thi s stat ement
For example there m
ay be more th an one p rice th at
would yiel d the sam e m ax imum of net returns But the
f und ament al principle invol ved i e th at monopo ly pric e
is determin ed by largest profit s would still be val id
.
,
.
,
.
.
,
.
,
Th e f ollowing table t ak en from P rofes sor Ely s
“
!
O utl ines of Economic s
will illustrat e the working of
th es e pr inciples :
’
,
,
0
3
03
03
03
03
03
.
.
1
.
.
7
06
2
.
.
0
5
04
3
5
.
.
0
.
.
Comment ing upo n th is illu stration the author says :
“
S tudy of the table will Show why in th e
ed here the monopoly price will stand
case assum
Competiti on if it were present
at s ix cents
would keep on increas ing the supply as long as
n orm al profit could be obt ained In our illus
tr ation th e l owest price at which product ion
could be carried on so as just to s ecu re a profit
abov e the expenses o f pr oduction w ould be f our
cent s ; and four cents w ould th e re f o r e be the
com pet itive price
But s ince th e m o
,
,
,
.
,
,
.
.
O p 1 99
.
.
tt mpt to show just what ate of decrease in
l t f mthe assu m
s l es wo l d
ed incr eas in pr ice
In practice th e
num
moditie nd wi th th m mmodi ty at
decr ease woul d va y wi th diff er ent com
M or eover i n actu l b usiness th v i b l xpens pe uni t wou l d
difle ent ti mes
o nt p oduced th
not b e con tant as i t f eq u ntl y h pp n th t th l ge th e m
Nei th of these featur es of the exampl e
xpens e f p oduction per unit
l ess th
however is at al l inconsistent wi th th p incipl es which it is intended to ill us t at e
h t
T is
b er of
does not. of
ab l e
u
a
r esu
r
e
cour se. a
e
ro
r
r
e e
.
a
,
r
,
o
e sa
s a
.
s
.
r
e
a
e
e s
e ar
a
es
e e
r
a
u
r
r
e
er
.
e
ar a
e co
r
.
r
18
COM PETI TN E A ND
nOpol i st
M O NOPOLY
C
PR I E
such contr ol over the product ion
th at he can control th e supply h e will cut ofi
pr oduction at
un its at which po int
dem and will fix a price o f six cents and will
z
iv
th
e
l
a
rge
st
n
et
re
u
n
e
i
t
r
v
g
h as
,
,
,
.
,
“
,
Th e term monopoly as commonly employed often
l ack s that pr eci sion o f d efinit ion which sci ent ific analys i s
It i s
w ould r equire yet it s meaning is fai r ly cl ear
intend ed to d es ignate a condition in whi ch th ose w ho
sel l have such control over the supp ly of their com
modif ies that they ar e able to fix the p rices at wh ich
th e comm odities ar e sold A S stat ed in the treat i se f rom
w h ich the abov e illu str at i on is tak en :
!
.
,
.
“
Monopoly m eans that substant i al unity of
act i on on the p ar t o f one or m or e p e rso n s eu
gaged in some kind of busine ss which gives
ex clusive cont rol
mo re particul ar ly al though
8
not so lely with r e spect to price
,
,
!
,
.
It is r ecogni z ed that m onopoly is not always com
pi et e and ab solute The definiti on r ef er s t o a perfect
type of monopoly whereas j ust as in the case of com
i
i
r
f
f
e
t
v
p
i
c
e
comp
et
i
t
on
be
p
r
e
t
ly
r
e
e
s
o
t
e
e
i
n
o
t
m
a
c
p
y
in the case of monopoly pr ic e monopoly m
ay be incom
“
.
!
,
,
,
,
,
,
We have a p ar t i al monopoly where ther e
i s a unified control ov e r a conside r able po r ti on
o f the indu str i al field but not ove r a suffi ci ent
d
to
iv
e
c
o
mplet
e
d
min
tion
of
the
h
l
e
o
a
o
w
13
g
“
,
:;
1
Neverthel ess and thi s i s th e impo r tant fact wheth er
compet ition i s f r ee o r limited and monopoly compl ete
or incompl et e th e fiel ds of com
p eti tion and m
onop ol y ar e
,
,
,
,
cons ider ed
7 p. 2 0 0
.
to b e dis tinct
.
8 p 1 88
.
.
99 1 91
.
TH E
C! R RE N T TH EOR Y O F PR ICE
[9
o clus i on then m
ay b e stated as f ol
low s : There i s a gr eat and gr owing field of
indust ry in which competition i s not natur al or
permanently pos s ib le for reasons expl ain ed in
the t ex t ; there is an oth e r field within which
!
monopoly does not and can not exist
Th e main po int s in the cu rrent theo ry of price m
ay
be thu s summ arized :
There ar e two sor t s of price compet itive and
I
monopoly e ach of which is det ermine d in accordance
w i th a principle pecu li ar t o it and qu it e unlike th at i n
accord ance with which the other is d eter mined
Th e essenti al condition of compet ition is flu idity
2
i e t rans ferability of capital l abor and busines s ability
f rom on e indu stry t o another
r
P
ric
e
under
competition
is
d
e
te
min
e
d
by
s
o
i
l
c
a
3
co st of production for on the one h and i f price r ises
profits will rise above th e norm al others
above this
will be attracted into the industry production will be
increased and price will fall ; while on th e other hand
if price f alls bel ow soci al cost pro fit s will f all b elow
the norm al som e will l eave th e indu st ry producti on w ill
be decre as ed and pri ce will r i se
a
The
es
senti
l
c
o
ndition
of
mon
opo
ly
is
s
u
ch
u
ni
t
y
4
o f action on the p art o f sell e rs as gives them ex cl u sive
control ove r price
P
rice
und
e
r
monopol
y
is
determined
by
t
he
po
in
t
5
th at will yield th e l arge st n et return s I f on th e one
h and pr i ce rises above this po int the los s f r om th e r e
su l ting dec re ase in s ales will more t han ofi set the gain
f rom the accompanying incr eas e in th e r at e o f pro fit ;
while on the othe r h and if pri ce f all s below thi s po int
th e l o ss f rom th e resulting decr ease in th e rate of pr o fit
more than ofi sets the gain f r o m the accompanying ia
creas e in sales In e ither case net profits ar e reduc ed
“
Ou r
c n
,
,
,
! 1
.
.
,
,
.
,
.
.
.
,
,
,
,
.
.
,
,
,
,
,
,
,
,
,
,
,
,
,
.
.
.
.
.
,
,
,
,
.
10
,
El y . p
.
: 96
.
,
.
CO MPETITIVE
20
A ND
MONOPOLY PR I CE
practical teaching of this theory of price is ap
parent : Except in the dist inct field where monopoly i s
natu ral make compet ition free and there will foll ow
norm al profits and by cons equence f air price Is the
th eory valid ?
The
,
,
,
.
III
H O W P R I CE S
A R E D ET ERM I NED
examining th e cu rrent th eo ry of pri ce with a V i ew
to d et ermining whether it s explan ation is corr ect and
satisfacto ry we will b egin with an analys i s and com
pari son of th e influence s that determin e compet itiv e price
and m on opo ly price respectively
It wil l be ob ser ved that in showing th at comp et itive
price tend s to equal soci al cost of producti on the method
employ ed i s to Sh ow th at price und e r the c ompetitive
condition s as sumed w i ll not p e r manently r em ain above
or below soci al cost I n like m anner th e meth od em
pl oyed to prove that monopoly price t end s to the point
onop
of l arge st return s is to show th at price under th e m
ol istic conditions assum ed will n ot pe rm anently rem ain
I t will f acilitat e a com
above or bel ow th at point
parison of the principle s according to whi ch each of these
tw o kind s of price is determined to bring together f or
comparison first the influ ence s whi ch prevent each f rom
pe rm anently rem aining above the point s stated and then
the influence s which prevent each f rom remain n b elow
the respect ive points
ay be asked :
Turning first to competit ive price it m
Why does compet itive price not ri se above soci al cost ?
The m any f orms in which th e an swer to th i s quer y might
be put ar e r educibl e t o on e viz becaus e o f c ompetition
Thus if shoes ar e being produced under so called com
IN
,
.
,
.
,
.
,
,
,
,
.
,
,
,
.
,
.
,
-
,
2!
CO M PETITIVE
22
A ND
M O NOPOLY PR I CE
onditions and $4 per pai r yi eld s to the pr o ducer
a f air p r o fit th e p r ice of th ese s hoes can not pe r m an ently
rem ain above $4 Fo r a tim e it is tr ue bef or e condi
t ion s can r eadj u st them selves a sel ler m
ay be abl e to
n
p
ir
bu
t
t
his
y
iel
d
s
m
o
r
e
t
h
a
n
o
r
m
l
e
t
r
a
a
a
a
e
s
g
p
p rofit other s wil l be draw n to th e shoe industr y and
competiti on w ill cause th e p r i ce to f all unt il it r each es $4
O n th e othe r h and to th e qu esti on Why d oes m o
nopol y pr i ce not ri se h igher th an it d oes ? th e an s wer
given is : B ecau se i f it did net pr ofits would be l ess
owing to a f al lin g 0 6 in sal es f or which th e incr eas ed
r at e of p r ofit pe r unit would n ot co mpen s ate
Thus
i f f or any r eason m onopoly shoul d com e to exist in the
p r oduction of shoes those in t he monopoly woul d no
longer be d et er r ed f rom rai sing the p rice abov e $4 per
pair by f ear o f competiti on w ith other sh oe m
anu f ac
turet s Th ey woul d th er efore rai s e the p r ice until the
d ecrease in sal es woul d les sen n et pr ofit s
Th is explanat ion i s u sually cons idered whol ly ade
f
or th e limit t o the tendency o f m
u
t
e
to
c
ou
n
t
c
a
a
o
q
It is und oubtedly corr ect as f ar
nOpol y pr ice upw ard
But does it go f ar enough ? Do es th is
as i t goes
enable u s to compare th e influence that keep s m onopo ly
pr i ce f rom going higher with the influence that k eeps
I n th e case of
compet it i ve pr ice from go ing h igh er ?
th e s al e of Sh oes under competi ti on the sell er can not
get more th an $4 p er pair becau se i f he ask s
the
w ould b e pu r ch as er w i l l go t o anoth er d ealer and th es e
tw o s el ler s o f sh oes ar e said to b e compet itor s b ecau se
they ar e rivals in seeki ng th e patr onage of pur ch aser s
each t r ying to attr act custom er s by off er ing a bett er in
du cem
ent th an his r ival i n th e sh ape of a l ow er p r i ce
When it is sai d that monopoly p rice is k ept f rom
a
n
o
f
n
i
g
h
i
h
e
r
b
e
c
us
e
t
h
e
l
oss
i
n
p
r
ofits
t
h
a
t
l
o
e
t
o
w
u
d
g
g
i
i
e
t
e
t
v
c
p
,
.
,
,
,
,
,
.
,
,
,
.
,
,
.
,
,
.
.
.
,
-
,
,
.
COMPETITIVE
24
A ND
MONOPOLY PR ICE
“
Th e compet ition of the market embraces not
only the buying and selling o f a giv en com
modity ( like w ood ) but al so the buying and
modities In this s ens e the
selling of al l com
p ete w i th the gr ocer s and the
w ood deal er s com
,
.
tail or s , as w el l as w i th
each oth er
!
coal
and
deal er s
w i th
2
.
There is undoubtedly a di ff erence between the rivalry
o f th o s e who s ell lik e comm odities and the rivalry o f
tho se who se el unlike commodit ies But this diff er ence
d oes not li e in the f act that one is competition and th e
other i s not comp et it ion R ival ry betw een tho se who
sell like com
modit ies i s probably as a r ul e m ore inten se
than that betw een sellers o f unlike com
modit ies but thi s
i s a diff erence in degree not in kind Thi s does not m ean
th at the difi er ence is unimpo r tant The very fact th at
in some in stances the competition that exi sts is too f eebl e
to stop th e upw ard t endency in price at the po int which
suffice s f or f air profits may j ustify steps to suppl ement
such inadequate competition But th e fact remains and
it s ultimat e consequence is by no means Slight th at it
i s competition that prevents price f rom going higher
both in the cas e o f competitive price and i n the case of
mon opoly price I n th e ultimat e analys i s the statem ent
that monopoly pr ice i s deter mined by the po int that will
yiel d the l argest n et retu rn s means only so f ar as th e
upw ard tendency o f m onopoly price is concerned th at
it i s det ermined by th e point which under th e ex is ting
p eti ti on will yield the l arges t n et r e
condi ti on of com
tu rn s A nd it i s equally tr ue of competitive price th at
it too is det er mined in its upw ard tend ency by the po int
under the exist ing condition of competit ion will
This po int in th e c as e
th e l argest net retu rns
ay be much above the point in the
of m on opoly price m
.
.
,
,
,
.
,
.
,
.
,
,
,
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,
,
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,
,
.
3
m p
Outli nss of Econo ics,
.
16 3 .
Not i talicis ed in th e or igi nal
.
PR I CES
H ow
AR E
DETER MIN ED
25
se of competitiv e pr ice ; but th i s is not due to th e f act
that difi er ent kind s of influences set th e lim it s It is
due r ath er to the f act th at competit i on w or k s in each
of the tw o case s wi th di ff ering efi ectivenes s
Taking up next th e influences which keep c ompet it ive
and m on opoly pri c e f r om go ing b elow ce r tain po ints it
will be recalled that cu rrent the or y teaches that competi
tive p rice does not per manently rem
ain below s oci al c ost
of pr oduct i on and that monopoly price i s maintained up
to the po int of maximum retu r n s Th e fi r st questi on
to be considered her e is : Why can m ono poly price be
kept up to the po int sp ecifi ed ? What ever m
ay b e th e
f orm s which the ans wers to thi s query take they w i ll
—
becau s e of the exi stence of
amoun t pr actic ally to this
su b stant i al unity o f act ion on th e par t of the p erson
or per son s engaged in the bu s ines s a unity of act ion
which re sult s in contr ol over the supply o f that which
th e pur chas er seek s to Obtain The monopol i st it i s
“
said f reed fromcomp etit ion and governe d only by de
mand i s able to adj ust supply to demand in such a w ay
th at th e p ric e will stand at th e poin t o f high est net t e
8
tu rn
O n th e othe r h and wh en competitive pr ic e is und er
con s ider at ion
th e reason as signed f or its maint enance
at s oci al cost of pr o duct i on is th at i f p rice f al ls b el ow
thi s som e will go out of bu sin ess production will be
d ecreased and pric e will go up This an sw er i s not
satis factor y becau se it involves the implication that price
h as wi thin it sel f som e spontaneous f orce such th at once
influences holding it down ar e rem oved pric e w ill of its
own accor d go up P rice doe s not go up ; it is put up
I f in the cas e o f the shoes m ention ed above comp etit ion
am ong th e se ller s r esult s in th e p r i ce be ing r educed t o
ca
.
,
,
.
,
,
.
,
,
“
!
,
.
,
,
,
,
!
.
,
,
,
,
,
.
,
,
.
,
3 fl y . I! 198.
.
,
CO MPETITIVE
26
fi
s
t
o
a
b
i
n
s
u
m
d
n
e
s
r
y
norm
l
p
r
o
t
e
e
s
a
a
c
e
s
$3
g
—it may b e expected that in tim e som e w ill go f romthe
al
m anu f actur e of Shoes to oth er fiel d s wh e re at l east nor m
p rofits can b e real ized B ut this f act even if it resul ts
in the m anu f actu r e o f f ewer sh oes i s not suffi cient to
account f or th e r es tor at i on of the pr ice o f sh oes to its
f or mer so called com petit ive figure $4
80 long as tw o
p roducer s rem ain in th e fi eld and continue to com
p ete
price will continue to f all N or i s thi s f act cont rover ted
by th e truth that producers can n ot continue indefinitely
Th e S ignificance of thi s lie s not
to produc e at a l os s
in cont rove rting th e propos it ion th at if producer s con
tinu e t o compet e p r ic e will continue t o f all bu t in th e
f act th at p roduce r s can not c ont inue to compete indefi
a
pai r
M O NOPOLY PR I CE
AN D
,
,
,
.
,
-
,
.
.
.
,
.
,
,
nitel y
.
Fur ther m ore the m er e ce ssation of competition is not
o f its elf sufli cient to expl ain the r esto rat ion of pric e to
ay b e cal l ed its n orm al po int and th is f or
$4 w hich m
th e reason just given th at pri ce doe s not m ove auto
matical l y I f competition driv es pr ice bel ow cost of pr o
duct ion price will move up as has been said only wh en
it i s put up and i t w il l b e pu t up onl y w hen ther e is su ch
ong th os e r em
aini ng i n
am
su bs tantial uni ty of acti on
th e b us iness as to give a contr ol over suppl y s uffici ent
at l eas t to enabl e themto b ring the p r i ce back again to
its norm al point
It is impo rtant to dist ingui sh h er e betw een the f act
“
of
sub stant ial un ity of act ion on the par t of on e or m or e
per so n s engaged in a business and th e method employed
—
a d ist in ction fundam ental
to secu re such unity of action
to th is analysi s b ut o f ten over look ed
Wh en com
p eti
“
un ity of
tio n d r ive s pric e below cost of pr oductio n
act i on
may f ollow m er ely becau se one per son is str onger
than h is competito rs and is th ereby enabl ed to h old out
,
,
,
,
.
,
,
,
,
“
!
.
!
,
,
,
.
,
!
H OW
PRI CES
T
AR E DE ER
M I NED
27
unti l they ar e driven into bank r uptcy l eaving him a
f ree fi eld ; or it m
ay r e su lt f r om th e pu r ch as e by on e
it m
ay ar ise
of th e int er est s of the other s ; or agai n
f r om an agr eem en t b etw een the com
petit ors as suming
—
b y which th ey con
th e ab sence of a l aw to the contrary
tr act not only to suspend competition but al so to unite
in rai sing the price ; o r final ly th e sub stant i al uni ty of
acti on with out whi ch p r i ce can no t b e put up m
ay com e
to ex i st without bankr uptcy purchase or agreem ent but
merely as the resu lt o f an independ ent recognition by
each th at h e is a lo se r fr om unr easonabl e comp etition
and w il l be a gainer by s pont aneou s ly acting in union
with the other s The perm anence and effi ciency o f a
unity of action th at rest s merely upon Such a spontan eous
recognition of mutu al ity o f int erest s will b e l ess than
when th at unity has f or it s bas is an agreement or th e
el imination o f one s compet itors bu t as a busine s s phe
nom
enon unity o f action is uni ty of act i on regardl ess of
how it i s brought about o r o f its efl ectivenes s
Mo re
over it is thi s uni ty of act i on and not compet ition which
i s responsibl e for the mainten ance o f pr ice up to soc ial
cost wh en it i s so m aintain ed
On e other explanation of the return of competitive
pr i ce to social cost cal ls f or brie f attention in pas s ing
S ome h ave ascr ibed this to compet ition among buyer s
Acco rding to th i s Vi ew compet iti on among sellers k eep s
pr i ce dow n t o social cost and competi ti on among buyer s
k eeps pr ice up to Social cost Such a meth od of r eason
ing is nothing sh or t of casu i st ical j ugglery wo r thy al one
o f the m odern pr esti digitator f or if thi s i s an adequate
exp l anat i on w e ar e f o rced to th e conclu s ion that com
petit ion i s ever yth ing and ex p lain s monopoly p r ice as
petitive pr ice Th e necessity of such a con
w ell as com
I f th e r etur n of p r ice to soci al
elu sion is appar ent
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CO MPET ITIVE
28
A ND
MONOPOLY PR ICE
cost after it h as f al l en below th at po int is to be ex
plained by the competit ion among buyers which ar i ses
w h en owing to th e low price s upply is decreased an
an al ogou s and equ ally valid expl anat ion is to be f ound
in th e cas e of m on opoly price It m
ay b e sai d th at
m on opoly price i s k ept up to it s high po int by the com
pet ition among buyer s wh ich ari s es wh en the monopolist
decr eas e s th e supply wh i ch h e Ofi er s on the m
arket
Ac
cording t o thi s m eth od of an alys is it is then competi
tion am ong buyers th at k eep s both competitive price up
to th e po int of social cost and mon opoly price up to th e
point of largest r etur ns Add this to the f act al r eady
shown viz that it i s competition which keeps com
i
f
a
n
d
o
e
t
pric
e
down
to
t
h
e
p
o
in
t
so
i
a
l
cos
t
m
o
i
e
c
t
v
p
nopol y price do wn to th e po int of l arge st return s and
th e conclusi on f ollow s as w as said th at al l pr ice mo
nopol y as well as compet itive is d ete rmin ed by comp e
tit ion
A s a m atter o f f act in so f ar as competition and
unity of action ar e oppo sing influen ces in their efi ect
on pr ice a val id an alys is o f price mu s t begin by d eter
mining wh ether these influ ences ar e t o be view ed as
th ey appear in th e acts of sel ler s or as th ey appear in
Whichever standpoint may be
th e act s of buyer s
adopted l ogical con s i st ency requires th at it be retain ed
th r oughout the analys i s I n the p r esent case competi
t ion and unity of act ion ar e viewed as the act s of sellers
b ecause thi s seem s th e m ost com
mon w ay of l ook ing at
th em Such f or example i s th e case when competiti on
is regarded as the saf eguard of society against extor
tionate pri ce t o con sumer s
Th e competition here m eant
i s clearly competition among s el ler s Similarly wh en
monopoly is said to lead to ex hor b itant prices th e m o
nOpol y thought o f i s a m onopoly on the part of seller s
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PR ICES
H ow
A RE
DETER MIN ED
29
From the standpoint of the sellers then it is sub
stantial unity of action on their p art which is responsible
f or keeping price up to soci al cost wh en it is so kept up
B ut as w as seen it is also substanti al unity of action
which enables the monopolist to keep price up to the
point of highest net returns M oreover the u ni ty of
p eti tiv e pr i ce
acti on w hi ch is ef ectiv e i n th e cas e of com
enon i n no w hi t difier ent in kind fr omth e
is a p h enom
‘
u ni ty of acti on w hi ch is eflective i n th e cas e of m
onop ol y
‘
pr i ce S u ch difler ence as ex is ts is w holl y one of degr ee
L CM the point here m ade should be misint erpreted
it may be permitted to repeat what w as said in a simil ar
connection in describing the relation of competition to
competitive and monopoly price The fact that it i s the
same influence which keeps both competitive price and
monopoly price from going lower the di ff erence being
one of degr ee not of kind does not warrant the con
Were unity
elu s ion th at the di ff erence is unimport ant
of action to ceas e from further influence in increasing
pr ice when it suffi ced to insu re the producer a fair t e
It is th en pre
tu r n there would be no trust problem
ci sel y bec ause uni ty of action
which is necessary and
useful to a degree m
ay and does go beyond the point of
necessity and usefulness that the monopoly problem
exists
N ever th eles s here as fo rmerly the fact remains and
is of practical mom ent that it is unity of action on
the par t of sellers involving a degree of control over
supply which is responsible for keeping price up both in
the case of monopoly price and in the case of competitive
p r ice Putting this conclu s ion along with the simil ar one
reached from an analysis of the reason why p r ice d oe s
not go higher it will be s een that current theory errs
in two impo rtant respects : neither competitive price nor
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CO MPETITIVE
O
3
MONOPOLY PR ICE
A ND
monopoly price is determined by one influence alon e ;
no r do the influence s which determine the one difi er in
kind from those which determine the other Both ar e
determined by the combined working ( I ) of compe
tition and ( 2 ) of unity of action When the fo rm er
predominates price f alls ; when the l atter predominates
price ri se s ; the actual price in any giv en case i s th e
resul tant o f the two
Two other important modifications of cu rrent th eo ry
follow as corollari es from the above anal ysi s First as
to the concept of monopoly It is custom ary to define
monopoly as such unity of action as gives th e seller
‘
exclu s ive co ntrol over price
It is to be as sumed th at
the price referr ed to here is the p r ice at which com
modities ar e actually sold and not merely the price at
which they ar e ofi er ed for sale But in fact the sell er
practically never has such excl usive control over price ;
th e buyer alway s h as s omething to say about th e pric e
at which a thing is s old because he d etermines wh eth er
he will accept the term s ofi er ed or will go el se w here
i f not for the same k ind of commodity th en for som e
5
other com
modity Comp etition in some degr ee is present
Thi s d oes not however di spos e of th e monopoly
question for the degr ee of control ex erci sed by s el l ers
may be so exces s ive as to work most serious injury
While however the rej ection as un sound of the concept
of ab solute monopoly d oes not dispos e of the monopoly
problem it does have a most impo r tant bearing upon the
direction in which a rati onal solution of that problem is
t o be sought
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mn pol y i f nd in th f il
mdity nd nt l v th e
nt l
v
com
t dis ti ngui h b etw n
E ly
P f
n b v (p
p i t whi h mmdi ty i l d A w
t i sti f mn p l y After
th di ti ng ui hing h
nt l ver p ice
ga d
h says
fo m l ting hi d fini ti n with mu h
ust b e
P i e i essenti l nd m
m
8
8
E
n
i
l
n
l
m
O
t
i
n
l
f
o
f
t
t
t
n
p
y
p
m
d
t
h
e
u
n
d
d
o
f
g
4
ur e
A
f q u nt
e
re
s
o
c
r ce a
r
s co
r
ua
r e ar
fu i
cause of con
e
ro
as
ee
r
o
e
co
s so
o
a co
s
“
s on in
as
e
o
a
e
a
es
ro
"
.
discussions
o er
s
s
s
c
car e,
o
o o
of
"
o
a
as see
r c
e
.
u
es
e
ou
ro
co
a
a o e
c ar ac er
!
s
o o
o er
r o essor
.
c o
s
o o o
a
co o
.
te
.
a
cs,
a
.
1
.
IV
A T R UST P O L ICY FA I R TO B IG BUS INE SS
TO TH E C O N SU MER
A ND
T H I S analysis of price and of the natu re and w o rking
of the influence s that determine price has as al ready
stated some impo rtant hear ings on the trust problem
I n the first place th e conclus ion s reached concer ning
price show th at the proposition that al l Contracts and
agreem
ents which limit competition necessar ily rest rain
trade is indefensible at least as f ar as trade in th e long
run i s concerned For not to limit competition at the
po int where it s fu r ther action wil l result in los s to pr o
du cer s means the ultim ate b ankruptcy of al l but the
strongest And when this po int i s reached compet ition
i s eliminated and trade restrained to a f ar gr eat er degree
than when there ar e s everal producers still in the field
even though they work together u nder som e sor t of an
agr eement
I t may be admitted that the immedi ate efi ect of le ssen
ing competition is to restrain trade fo r competition
means lowered price s and lowered price s m ean as a rule
larger sales So even the competition that brings actu al
los s to the competitor s will lead to larger tr ade but only
t empo r ar ily When such competition h as worked out its
inevitabl e result it necess arily eliminate s itself and the
result is loss to all I t i s a truism that the interests
o f the consumer quite as much as the interests of the
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32
A
PA I R TR
U ST POLICY
33
producer call for fair profits to the l atter The so called
rule of reason as applied to the interpretation of the
Ant i Trust l aw in the recent decisions of the Supreme
Cour t in so f ar as it involves the principle that not al l
acts interfe r i ng with competition but only s uch as u n
reasonably interfere with competiti on restrain trade is
unques tionably sound It is by no means improbable
th at if this view had been taken in the early interpreta
ti ons of th e Anti T r u st l aw industri al consolidation
would h ave developed at a much more moderate pace
and the trust problem would be less acu te
A second point suggested by the analysis of price
concer ns the so called natural l aws of competition
referr ed to in the N orther n Securities case and not in
frequently in the general discussion of the monopoly
question Wh at ar e these natur al laws of competition
whose unimpeded operation conduces to public advan
tage ? O ne might suppose from the common use of the
ter m that there ar e ce r tain well known l aws of compe
titi on natural to industry somewhat as there is a l aw of
a
a
r
vit
tion
n
t
ur
l
to
the
physic
a
l
world
Es
peci
lly
is
a
a
a
g
such an as sumption w arranted when without stating
the s e natural l aws of Competiti on they ar e referred
to not incidentally but as fund amental to the interpret a
t ion of a mo st import ant Federal l aw by the Supreme
Court But search for these law s i s vain N o treatise
on l aw or economics supplies them They h ave never
been formul ated They do not exist As a matter of
f act the expression natu ral laws o f compet ition is but
a m eth od of referring to the widespre ad but l argely u n
“
competition i s the life o f trade
analy zed opinion th at
Such crude concept s will no more suffi ce as th e basis o f
a po licy th at i s to govern the business o f to day th an
unt e st ed steel suffi ce s as a basis o f the vast engineering
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“
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!
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COMPETITIVE
34
M O N OPOLY PR I CE
A ND
works of modern industry Wh en subj ected to an aly sis
as has been shown the n atur al results of competition
if left to it self ar e its own de struction and public injury
A s w as noted at the outset the present trust policy
seek s to eliminate cert ain forms of industry to the end
that the field may be left to free competition in the
belief th at free competition will insure f air price R ef
erence h as also been m ade to the fact that up to the
present th at policy h as f ailed sign ally to accomplish the
results expected The measures thus f ar adopted h ave
not secured th e unimpeded working of competition
N ot th at the s e efi or ts h ave been wholly fruitless but
that the consensus of opinion is that an eff ective solution
of the trust problem h as not yet been enacted into l aw
Various re asons for this f ailure ar e assigned and cor
r espondingl y v arious remedies ar e proposed
Their de
tailed consideration need not be entered upon here The
point that calls for emph asis in this connection is that
if th e above criticism of the current vi ew s of price is
val id the measures already adopted were foredoom ed
t o failure as will be all other measures which res t upon
the same basis And for this reason : Granting that
soci al cost of production i e the expense o f production
to the individual plus a re asonable profit is the correct
standard of a f air price this standard can not be reached
through competition alone Th e indis p ens abl e r equis i te
u
n
r
ec
r
i
r
i
e
o
u
r
e
e
f
i
p
c
i
s
t
s
h
p
o
p
a
o
r
s
a
c
t
e
r
er
n
b
n
a
l
c
i
a
g
f
g
p eti ti on and of uni ty of acti on th e for m
of com
er i ns ur
the l atter ins ur ing fair ness
er
i ng fair ness to th e consu m
to th e p r odu cer
ay be the details of the
Wh atever m
policy when they ar e worked out thi s is it s starting point
and the s oo ner it is recognized the s ooner m
ay we expect
to discover the specific measures neces sary to a rational
and eff ective policy
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A PA IR
TR
U ST POL I CY
Given
35
this as the basic consideration the next step
will be to dete r mine the meth od by which the desired
bal ance of competition and unity of action can be se
A S Shown above under a condition of perfect
cured
fluidity of capital l abor and busine s s ability the b al anc
ing of these two opposing influences would be autom atic
O n the one h and if consumers were called upon to pay
too much the exceptional profits aff ord ed by the high
price would attract other producers and competition
would compel a lower price ; on th e other h and if pr o
du cer s failed to secure a f air return in any field such
ch anges among producers would take pl ace as would
result in the unity of action necessary to force price up
to the point of f airness
But capital l abor and busines s ability ar e not per
f ectl y fluid This fact i s recognized in the current theory
of price but the method of m eeting it involves a serious
omission in th at theory and a fatal flaw in the policy
b ased upon it I t will be recalled th at according to this
“
theory not al l capital al l labor and all business ability
n eed be fluid to s ecu re fair price The existence o f some
free capital some free l abor and some free busin ess
ability s eeking a field for operation is considered suf
ficient
But is it ? To wh at extent m
ay f airnes s be
expecte d from the fluidity of th at portion of capital
l abo r and busines s ability not yet employed in industr y ?
M anifestly the f airness insured by this is f airness to the
consumer and to the consumer only It is the prevention
of high prices i e the conservation of the interests of
the purchaser s alone th at can be expected from this
parti al fluidity Wh at meanwhile of fairness to the pr o
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ducer ?
I t i s a striking and an impor tant f eature of the
pre sent industri al policy and of the public opinion back
5 See ab ove,
p
.
15
.
COMPETITIVE
6
3
MON OPOLY PR ICE
A ND
it th at the consumer s interests al one ar e thought
to demand special consideration I t seems to be assumed
I f the m atter
th at the producer can take care of himself
ever enters the mind it is probably di smis sed with the
thought : What need of protection has the m odern tru st
whose resou r ces ar e to be reckoned in millions ? Whereas
the very m agnitude of the interests at stake intensify the
neces sity of adequate means f or their saf eguarding
Furthermore the efi or ts in behalf of consumer s have
often led to measures denying to producers the onl y
means by which they can defend themselves viz an
eff ective unity of action In defense of such a policy
may be urged the danger of the abuse of the power
which unity of action gives if it is permitted to ex ist
This danger i s a very real one and herein l ies the crux
of the problem : How can the interests of the consumer s
be con served while allowing to producers the unity of
O n the one hand
action which is indispens able to them ?
is the trite but true f act that unrestrained freedom to
combine is intolerable But on the other h and is the
equal ly tr ue fact which whether trite or not can not
be too strongly emphasized that no policy looking to
fairnes s can be expected to succeed which does not pro
vide f airnes s f or the producer as well as f or the con
sum er
While it is true that perfect fluidity of industrial
agencies does not exi st and h as never existed this f act
h as not alway s been as s erious a h andicap as n ow to
the att ainment of a fair price through the spontaneous
working of bu s iness influences Du ring the early par t
of the ninete enth c en tu ry
when the idea w as taking
shape th at competition i s adequate to the regul ation o f
general indu stry if only it can be allowed free pl ay
the Char acter of business f avored the s o called let al one
of
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A
PA IR
TR UST POLI CY
37
l f bnegation policy Though it w as equally t rue
then as now that f ai r price i s th e result not o f compe
tit ion al on e but o f compet ition and un ity o f action co
operating th e f ailure t o recognize thi s fact and the con
sequent glorification o i competition w as n ot a s eriou s
m ater Am ong th e f eatures o f th e industr y o f that tim e
“
which f avored the let alone pol icy w er e th e smal l
s i ze of busin ess units their var i ed character th e r el a
tivel y small part p l ay ed by capit al and especi all y by fixed
capit al
and the ind ividual or par t n er ship f or m o f or
or
-a
se
.
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!
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i
i
n
z
n
t
a
o
a
g
.
When indu st rie s w er e small and m arkets cor r espond
ingl y lim it ed com
petition among producers w as not so
intense as now M oreover there w as f requentl y a per
sonal rel ation b etween producer and con sumer which
conduced to mutual f airness The impersonal m oder n
Again th e fact that
co r po rat i on w as th en the except i on
each indus tr y as a r ul e supplied a variety of pr oducts
tend ed to so ften th e eff ect o f an ex cess ive competit ion
in th e cas e of som
e articl es as the seller might mak e
up f or unduly low p rofits on th em by correspondingly
al l par t pl ayed
high p r o fits on oth er s The rel atively sm
by capital s ignifi ed a larg er flu id ity of bus iness ability
Unde r Such conditions it w as eas i er for one to leave an
unpr ofitable fiel d and betak e h im self to a p rofitable one
a t rans f er w h i ch w as r ender e d easier then th an now ,too
by th e r el atively sm
all amount of fix ed capital r equi re d
in indu st ries In shor t bus ines s abil ity and capital - and
f or that m
l abor al so w hich h ad not yet becom
atter
e
—
inten sely speci al i zed were h ighly flui d and even w h er e
flu idity w as lack ing cond itions ex isted w h ich tend ed to
f
a
v
e
n
t
u
n
i
r
n
es
s
r
e
p
The contr ast betw een th e char acter of bu siness at
th e beginning of the nineteenth centur y and its pr esent
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