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Such a restriction of output means that the producer will be employ-
ing less of the specific resource B than is in fact available. Competition
between the various owners of this resource will therefore force down its
price close to zero (assuming the owners of resource B do not form a cartel).
The monopoly position of the producer, gained from his control of resource
284 MARKET THEORY AND THE PRICE SYSTEM


A, has thus made it possible for him to cut back output, and hence the
employment of resource B to a point where the latter resource has a zero
price. His monopoly position, as in cases considered earlier, has made it
in his interest to deny consumers the output obtainable from quantities of
the resource which he monopolizes (even though consumers value additional
units of product more highly than the cost of other required productive
factors); but in addition this same interest of the producer has implicitly
required that he deny consumers the output obtainable from a quantity of
resource B which he does not monopolize. Since both A and B are specific
and essential to the product, any restriction of the supply of A allocated to
production, implies also a corresponding "waste" of some of B. The
monopoly position of the owner of resource A, coupled with the specificity
of resource B, together have robbed owners of B of any income they might
have been able to obtain in the market through the sale of their endowments
of resource B, and also robbed consumers in general of the quantity CBB
of output, for whose production they would have been prepared to pay.17

FURTHER REMARKS ON MONOPOLIZED PRODUCTS
Until now we have considered the possibility of the monopolization of
production, and consequent restriction of output, only as the result of the
sole control by a producer of a resource essential to the production of a
particular product. All the consequences for market phenomena that we
were able to deduce as resulting from such a monopoly of production sprang
thus from the favored position of a producer, not in his capacity of entre-
preneur, but as an owner of resources. The monopoly gain obtained by a
monopolist-producer who has successfully exploited his position is thus not
a kind of entrepreneurial profit, but a kind of gain that may be extracted
from the market by a monopolist-seller of a resource. Where no monopoly
of any single resource exists, there is, in the absence of institutional barriers,
no a priori reason why any one producer-entrepreneur should find himself
in a favored position concerning any particular branch of production.
There may be cases of monopoly in production where the existence of
a monopolized resource may not be immediately perceived. It may happen
that a number of producers are competing with each other in the output
and sale of a particular product, and yet each of the producers feels that
his product commands the loyalty of at least some of his customers. Each
producer feels confident that even if he were openly to raise the price of his
product a little higher than the prices charged by his competitors, not all
of his customers would switch to the products of his competitors. Clearly
such a situation must mean simply that each of these producers is producing
17 Compare with Mises, L.v., Human Action, Yale University Press, New Haven, Con-
necticut, 1949, pp. 380-381.
MONOPOLY AND COMPETITION IN THE GENERAL MARKET 285


a product that is not exactly the same as the products of the other producers
in the group”at any rate from the point of view of consumers (which is all
that matters). There may be numerous factors capable of differentiating
the product of one producer from closely similar products produced by
other producers, in the eyes of consumers. The packaging, the color, the
location of production, the name a product is marketed under”these and
similar factors may make two products "different" from one another to
consumers, even though an outsider might pronounce them "the same."
While each of the producers may be producing a product that, in this
sense, is "unique," they are, of course, still competitors with each other.
We have seen that a producer of any product experiences the competition
of producers of other products; certainly a producer will feel the competi-
tion of producers whose products differ only slightly from his own. On the
other hand, in the strict sense of the term, the sole producer of a product,
no matter how slightly it is different from others, may still be called a
monopolist of his product if he has sole control over a resource that is
responsible for the uniqueness of his product. (If he does not possess sole
control over any such resource, then there is no reason why any uniqueness
that he imparts to his product should not be achieved by other producers,
too, if this proves profitable.)18 But there may well be monopolized re-
sources that make possible the product differentiation, and these may not
always be immediately perceived, and may sometimes be the result of institu-
tional barriers.
A catchy trade name, for example, may be such a resource that could
be monopolized as a result of appropriate laws. A special location of
production, "superior" in the eyes of some customers to alternative loca-
tions, may be another such monopolized resource.19 The good name ac-
quired by a particular producer through past activities may be yet another
such resource (one which, in the nature of things, is monopolized, at any
rate in the short run). These may not be immediately recognized as being
resources, so that the source of a monopoly in the production of a differen-
tiated product may not be immediately perceived as resulting from a re-
source monopoly. But from the point of view of pure theory, it is clear,

18 In the price theory literature these cases have acquired the name monopolistic
competition. In this (very voluminous) literature the existence of a resource monopoly
(as foundation for the restriction of output) has not been emphasized. Within the
framework of discussion adopted for the present chapter the cases labeled "monopolistic
competition" differ or do not differ from bona fide monopoly cases insofar as they do or
do not involve resource monopoly.
19 These resources, it is noticed, confer an advantage over the similar, but "inferior"
resources, used by the other producers. The monopolized resources, in these cases, are
"indispensable" only with respect to the advantage which they confer. For an excellent
discussion of this point see Bain, J. S., Pricing, Distribution and Employment (rev. ed.),
Holt Inc., New York, 1953, p. 195.
286 MARKET THEORY AND THE PRICE SYSTEM


anything that contributes toward making a product superior in any way,
from the point of view of consumers, is a factor of production.
As far as the impact upon the market exerted by the uniqueness of
such a differentiated product is concerned, the relevant analysis is no dif-
ferent from the analysis of the activities of all monopolist-producers. We
have seen that the monopoly of production, which is the result of sole con-
trol over an essential resource, may or may not lead to monopolistic restric-
tion of output below the competitive level. Where there are a number of
producers each producing a product that he is able to differentiate from
the others by virtue of a resource that he monopolizes, each of them will
certainly produce an output where marginal revenue is just balanced by
the marginal cost of all resources except the monopolized one. This may or
may not call for monopolistic restriction of output. The less important
the differences between products, the less likely it will be, other things being
the same, that a producer will stand to gain by monopolistic restriction of
output. Even where the difference between two products is considerable,
the higher price obtained for the superior product of course simply may
reflect its relative superiority in the eyes of the public, rather than be the
result of monopolistic restriction of its supply.
So far from resulting in monopolistic exploitation of the market, the
various methods whereby producers differentiate their products, moreover,
sometimes may be simply the very means with which they compete with
one another. We know that the essence of the competitive market process
is that each participant seeks to obtain more desirable opportunities for
himself through offering the market opportunities superior to those avail-
able elsewhere. Entrepreneurs with superior knowledge of the availability
of resources and of the demand for various products can earn profits by
offering consumers better and cheaper products than other entrepreneurs
less well-informed about market conditions. The attempt to offer to sell
a given product at a lower price is only one of the dimensions competitive
market activity may proceed along (although it is, admittedly, the dimension
analyzed most thoroughly in the literature).20 Entrepreneurs will compete
with each other, in addition, as we have seen, in the selection of which prod-
uct to produce”and this includes of course the selection of quality (or
qualities), which packaging to use, which location to produce at, which name
to assign the product, and so on. Thus, if (without any monopoly of a
resource) an entrepreneur is the only one among a group of producers of
a product who chooses to package the product in a particular way, this
simply means that other entrepreneurs believe they can compete more
effectively by other means. Just as we know that, until equilibrium has
20 The traditional emphasis on price competition seems partly due to the fact that in
the analysis of the "very short run" (the market where no further production is possible),
it is through price competition that the market does, in fact, achieve results.
MONOPOLY AND COMPETITION IN THE GENERAL MARKET 287


been attained, different entrepreneurs may be asking different prices in
the market for the same product, so also may they be offering different
varieties of the product to the market in their attempts to most successfully
cater to the wishes of consumers.

THE SINGLE PRODUCER WITHOUT MONOPOLY
The remarks in the preceding sections should help, in addition, in
explaining the case where a particular product happens to be produced by
only one producer who does not control the supply of any of the resources
required (either by technology or by institutional conditions) for his prod-
uct. Such a producer, it is clear, may be the only producer in his "industry,"
but certainly does not monopolize production. His situation is usually
described as one in which he faces potential competition. The situation
might be one, for example, where all other entrepreneurs happened to
believe that this particular product could be produced only at a loss, so that
only one entrepreneur undertook the risk of building and equipping a
plant for the production of this product. The single producer may know
that it is perhaps within his power in the short run to restrict output, and
to raise the price that he asks for his product, without fear that his customers
will turn to another source of supply for this same product at a lower price.
On the other hand, he also knows that there is nothing to stop the eventual
emergence of competing producers of this product, and that a restriction
of his own long-run capacity in order to secure higher prices will certainly
invite the competition of other producers eager to sell the additional units
of output for whose production consumers are prepared to pay. If the
single producer is intent on avoiding long-run losses as well as on securing
short-run supernormal gain, he will avoid a restrictive price-output policy.
A special case of considerable theoretical (and practical) interest arises
where a particular product happens to be produced by only one producer
as a result of the economies of large-scale production. If the long-run
average cost curve for a particular product is declining throughout its rele-
vant extension, the competition of entrepreneurs will eventually bring about
the emergence of bigger and bigger producers. The industry will not be
in equilibrium with a large number of small producers. Whatever the
price of the product may be, a firm that has been satisfied to produce with
a plant designed for a small output volume will realize that it could do
even better with a bigger scale of plant. In the long run, therefore, competi-
tion between producers will force them to seek a bigger output volume.
The bigger the scale of plant, the lower the price a producer can afford to
sell the product at. Producers will therefore seek to offer consumers lower
prices than others are offering through continual increases in the scale of
their operations. On the other hand, of course, if bigger producers are to
288 MARKET THEORY AND THE PRICE SYSTEM


do well enough in the industry to wish to stay there, the aggregate output
must not be larger than that which can be sold at a price high enough to
cover costs of production.21 Thus, in the long run the competition among
producers will force out of the industry a sufficient number of producers
so that those remaining can cover their costs. Eventually, it is conceivable
that a single producer may be able to produce the entire supply of the
product at so low a cost and therefore at so low a price, that it pays no one
else to remain in the industry.
A tendency toward the emergence of big-scale production will certainly
evolve in such an industry. So long as this is the result of competition, it is
clear this tendency operates consistently with the tenor of the competitive
market process, in general, to force entrepreneurs to organize production
as efficiently as possible. On the other hand, it is also clear that where only
one or only a very small number of larger producers are left as a result of
this competitive process, a cutback in production may be tempted (if demand
conditions are propitious) in order to achieve greater gains. As we have
seen, such a single producer may be in a position to do this during the short
run. A producer with a specialized large-scale plant, which would require
much capital and time to duplicate, does in fact monopolize a resource
essential to the production of his product. However, it is important to
recognize that he monopolizes this resource only from a short-run viewpoint.
In the long run, anyone who believes he can do better in this industry than
anywhere else can raise all the necessary capital and buy all the productive
factors required to erect another plant large enough to secure all the
economies of big-scale production. (If the first single producer has been
using a scale of plant that has not yet exhausted all possible economies of
scale, then in the long run it will certainly pay other entrepreneurs to con-
tinue the competitive process whereby ever bigger and bigger plants emerge.
Moreover, if we momentarily relax our habitual ceteris paribus assumptions
just sufficiently to consider the impact of a progressing technology, it is clear
that in the long run competing entrepreneurs will be able to set up newer,
more efficient plants than those of the existing "short-run monopolist.")
Thus, while a single large producer might be tempted to underutilize
his plant (in other words to deny consumers the output obtainable from a
resource that he monopolizes in the short run”even though consumers are
willing to pay the additional costs of the other required factors), he would
know that in the long run this would only attract other entrepreneurs into
the industry who will be able to produce as least as cheaply as he himself

21 This assumes that the market demand curve for the product at least for large out-
puts, does slope downward. Considering the analysis of Ch. 5, this assumption is em-
inently reasonable. Economies of scale will boost industry output to the point where
the demand curve, in fact, does slope downward.
MONOPOLY AND COMPETITION IN THE GENERAL MARKET 289


can. Potential competition may thus effectively bar even short-run restric-
tion of output by the single producer.

SOME REMARKS ON THE MODEL OF "PURE"
OR "PERFECT" COMPETITION
Thus far in this book very little explicit mention has been made of a
model very much used by writers on price theory; namely, the model of a
"perfectly" (or "purely") competitive economy. In this model it is assumed,
in addition to the general assumptions that set up a market system, that
there are so many buyers and sellers of each resource and product that no
one buyer or seller is able by himself to influence market prices, and also
that there is nothing preventing any market participant from entering into
the production of any product he chooses. (Many writers also include the
further condition of perfect knowledge, especially where they refer to the
perfect competition model.) Although models based on these assumptions
have played a very important part in the development of price theory in
this century, and despite the considerable pedagogical usefulness of such
models, they do not contribute significantly to an understanding of the
market process. Analysis of perfectly competitive models is usually con-
fined almost exclusively to the state of competitive equilibrium. (In fact it
has frequently been pointed out that rather serious logical problems arise
when an attempt is made to find out how a purely competitive industry
can ever conceivably attain a state of equilibrium from any other initial
position.) 22
One implication of perfectly competitive models is of particular im-
portance in connection with the discussions of the preceding sections.
Implied in the definition of a perfectly competitive industry is the condition
that each seller of a resource or of a product faces a perfectly elastic demand
curve for what he sells, and also that each buyer of a resource or of a
product faces a perfectly elastic supply curve of what he buys. (Sometimes
perfectly competitive conditions are defined in these terms.) These con-
ditions reflect the assumptions that no seller can raise the price (even
slightly) no matter how he may restrict the quantity that he offers the
market, and also that he will not lower the price no matter how much he
offers to sell to the market; and that no buyer can lower price no matter
how little he buys, and also that he will not raise price no matter how
much he seeks to buy. It follows from these perfect-elasticity assumptions
that to any seller under perfect competition, marginal revenue is equal,

22 In addition, it has frequently been complained, the term pure (or perfect) "com-
petition" is a misnomer, since it requires conditions that prevent individual market par-
ticipants from engaging in any of those activities usually understood by the verb "to
compete."
290 MARKET THEORY AND THE PRICE SYSTEM

for all possible sales quantities, to his average revenue (which is of course
the market price of what he sells).23 Similarly, to any buyer under perfect
competition, marginal cost is for all possible quantities purchased equal
to average cost (which is simply the market price of what he buys). Now,
since every seller of a product will always seek (with or without perfect
competition) to sell a quantity for which his marginal revenue just balances
his marginal cost of production, it follows that in perfect competition,
equilibrium requires that for all producers output be such that marginal
cost of production just balance product price. And similarly since every
buyer of a resource seeks to employ just enough for the increment in rev-
enue obtainable through the employment of a marginal unit of it to be
just balanced by its marginal cost to him, it follows that in perfect com-
petition, equilibrium requires that for all producers output, and the
proportions of inputs, be such that for each resource the additional revenue
obtained from the marginal unit be just balanced by the resource price.
As a result of the attention paid to the model of perfect competition,
a special significance has frequently thus come to be attached to the equality
for a producer both (a) of marginal cost of production and product price,
and (b) of additional revenue derived from the marginal unit of each re-
source and resource price. Any excess in the price of a product over
its marginal cost of production (or any excess in the revenue obtained
from the marginal unit of a resource, over the price of the resource) being
a departure from perfectly competitive conditions, is immediately associ-
ated with monopolistic or monopsonistic control. Thus the possibility
of a producer being faced with demand curves and supply curves of less
than perfect elasticity (and thus leading to a volume of output where
product price is greater than its marginal cost of production, and the price
of a resource less than the additional revenue obtained through the em-
ployment of a marginal unit of it) is described as monopolistic deviation
from the standards of a perfectly competitive market.
It should be emphasized that such conditions (while certainly inconsist-
ent with the assumptions of a perfectly competitive economy) need not be
accompanied by the monopoly of any one resource and are consequently
different from conditions involving deliberate restriction of output through
denying to the market the use of an available resource. The monopo-
listic restriction of output that we found to be a possible consequence of
monopoly control of a resource should therefore not be considered as the
case symmetrically opposite to the perfect competitive model.24 Rather,

23 See p . 98.
24
In the context of the "perfect-competition" models, and hence also of the monop-
olistic-competition literature, the polar opposite to perfect competition is provided by
the case of the single producer in an industry that (a) does not permit entry of new
producers and (b) is not faced with the competition of close substitutes.
MONOPOLY AND COMPETITION IN THE GENERAL MARKET 291


monopolistic restriction of output resulting from sole control over a resource
should be seen as analytically counterposed to the situation in a "competi-
tive" market25 where competition means simply the freedom for a person
to produce anything that he chooses (without the assumption that when
any one product is produced, it is in fact produced by a very large number
of "atomistic" producers).
When attention is focused exclusively on the state of equilibrium,
a significant difference may appear between the performance of a market
model where each participant faces only perfectly elastic supply and de-
mand curves, and the performance of market models where these curves
("monopolistically") have some slope. But when, as in this book, the
focus of interest is in the market process (leading to equilibrium, possibly),
then the significant distinction is the one emphasized in this chapter;
namely, whether or not market conditions make it worthwhile for the
monopolist-resource-owner-producer to deny to consumers a quantity of
output (one of the resources for which the producer himself has available,
and the remaining resources for which consumers are willing to pay for).
Certainly the idea should be avoided that the assumptions that character-
ize the perfect competition market are in any sense "normal" or "standard"
for a market economy.

MONOPOLISTIC PRICE DISCRIMINATION
Finally, we consider the possibility that the existence of monopoly
control over supply may lead to the emergence of more than one price for
a particular good. Under competition, we have seen, such a state of affairs
must be intrinsically unstable. Should two competing sellers charge differ-
ent prices for the same good, buyers will cease buying (as soon as they
discover the true state of affairs) from the higher priced seller. Of course
where a seller is able to sell at prices considerably below those of his com-
petitors, he may be in a position to demand different prices for his product
from different buyers. But, with no monopoly over required resources,
competition between sellers will eventually enable them all to sell for the
same low prices. For this reason the analysis of price discrimination”
the sale of the same product by a seller to different buyers at different prices
”is usually confined to monopoly situations.
Under certain conditions it may be feasible for, and in the interest
of, a monopolist-seller (either of a resource or of a product) to sell to

25 The term free competition sometimes has been used to denote closely similar mod-
els (but also has been used to cover other cases). See Scitovsky, T., Welfare and Com-
petition, George Allen & Unwin, Ltd., London, 1952, Ch. 15; and also Machlup, F., The
Economics of Sellers' Competition, Johns Hopkins University Press, Baltimore, 1952,
p. 104.
292 MARKET THEORY AND THE PRICE SYSTEM

some buyers at prices lower than those that he obtains from other sellers.
For this to be possible, the seller must feel sure that the buyers from
whom he demands the higher prices are not able to buy the good from the
other buyers to whom he is selling for lower prices. Clearly if this con-
dition is not fulfilled, it will pay the latter group of buyers to buy at the
low prices and then resell to the first group of buyers at prices below those
demanded by the monopolist-seller. For price discrimination to be worth-
while an additional condition is that net proceeds with discrimination be
higher than without. This condition, it will be seen shortly, depends on
the respective conditions of demand within each of the groups of buyers it
is possible to discriminate among.
Suppose that a monopolist-seller knows that those who buy from him
(or who might buy at low enough prices) fall naturally into two separate
groups between which no resale of the good (which he sells) is technically
feasible.26 Suppose further that he has available a given quantity (q) for
sale, and, pondering on how to secure the greatest possible revenue from
its sale, is considering asking a price that is the highest price the entire
quantity can be sold at (without discrimination and without holding any
units entirely off the market). At this price, the seller knows, the first
group of buyers (group A) will buy altogether a quantity qa, and the second
group (group B) will buy quantity qh, (qa + qb = q). Now, the respective
demand conditions in group A and group B may be such that the marginal
revenue derived from the last unit sold to group A is less than the marginal
revenue that would be obtained through the sale of an additional unit to
group B. In this case it is in the seller's interest to sell (at a higher price)
a quantity (qa ” 1) units to group A (rather than qa) and a quantity (qb + 1)
units at a lower price to group B (rather than qb), since he would gain a
greater increment in revenue from the latter than he would have to sac-
rifice in group A. The demand situation within each of the two groups,
A and B, is such that the (qb + l) st unit is valued more highly by group
B (as measured by the sums that the group as a whole is prepared to pay
respectively for qb units and for (qb + 1) units) than the (qa)th unit is
valued by group A (as measured by the sums that the group as a whole is
prepared to pay respectively for (qa ” 1) units and for qa units). So long,

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