Chapter 42 Chapter 14 Monopoly Theory

Section 1 We will now compare the monopolist's gain from high prices with the public benefit of low prices. It has never been thought that the monopolist, in pursuing his own interest, follows naturally the path which is most conducive to the welfare of society as a whole, because we do not regard him as more important than any other member of society.The theory of maximum satisfaction has never been applied to the supply and demand of monopoly products.But much can be learned by studying the interests of the monopolist in relation to the rest of society, and by studying the general conditions of possible measures which are more favorable to the society as a whole than if the monopolist had only his own interests in mind.To this end, we now seek a method of comparing the relative benefits to the public and to the monopolist if the monopolist pursues different courses.

In the second volume we shall study the various forms of modern business alliances and monopolies, some of the most important of which, such as "trusts," are only recent creations.We now consider only those general factors which determine the value of a monopoly, which are more or less clearly ascertainable in each case where a person or group of people has the power to fix the quantity or price of the commodity sold. In the second section, it is obvious that the monopolist is concerned with obtaining the maximum net income. The monopolist's interest is evidently not in regulating supply and demand so that he can sell his commodities at a price which is just sufficient to cover his production costs, but in regulating them so as to furnish him with the greatest possible sum of net income.

But here we encounter difficulties concerning the meaning of the term net income.For the supply-price of commodities produced under free competition includes the normal profit; the whole of it, or at any rate the remainder after deducting the interest on the capital employed and the premium on loss insurance, is often reckoned indiscriminately as net revenue.When a person runs his own business, he often does not distinguish between the profits which are actually his own management compensation, and the additional benefits resulting from the fact that the business is somewhat monopolistic. .

This difficulty is largely avoidable in the case of a public corporation; where all, nearly all overhead is charged as a definite sum, and the net income of the corporation is paid out of it before the net income is declared. deducted from the gross income. The net income distributed to shareholders includes interest on invested capital and insurance premiums for risk losses, and rarely includes or does not include management remuneration; therefore, the difference between dividends and so-called interest and insurance premiums is the monopoly income we are looking for . As it is easier to state exactly this amount of net revenue when a public company has a monopoly than a private factory, we shall take the example of a certain gas company which has a monopoly over the supply of gas to a certain town.For simplicity it is assumed that the company has invested all of its own capital in capital equipment and that any further capital required to expand the business can be obtained by issuing bonds at a fixed rate of interest.

The third section monopoly income table. The demand schedule for gas is the same as it would be under non-monopoly conditions; it states the price per thousand cubic feet (cubic feet, the same below) according to which urban consumers will use how many feet.But the supply schedule must show the normal costs of production for various quantities of supply; and these costs include interest on all its capital (whether The wages of long-term staff, and how much these wages are based on the needs of their work, therefore, increase with the increase of gas production.The practice of the monopoly income statement may be illustrated as follows: for various quantities of the commodity, its demand price and the supply price calculated in the above way are listed, and the various supply prices are subtracted from the corresponding demand prices, and the price of the commodity is calculated. The corresponding amount is included in the column of monopoly income for this difference.

For example, if a billion feet of gas could be sold annually at three shillings per thousand feet, and the supply price of this quantity was two shillings and ninepence per thousand feet, then three shillings; it shows a total net proceeds of three million pence, or twelve thousand five hundred pounds, upon the sale of this quantity.The company only pays attention to its current dividends, and its purpose is to set the price of gas at the level of earning the largest possible total net income. Section 4. A constant total tax on monopoly will not reduce production, nor will a tax proportional to the monopoly's net income; but if the tax is levied on output, it will reduce production.

Suppose the conditions of supply are changed; some new expense must be expended, or some old expense saved; or perhaps a new tax is paid, or subsidized. Assume first that the increase or decrease of this expense is equal to a fixed amount, borne by the industry as an indivisible whole, and not varied by variations in the output of commodities.Then, irrespective of the price charged and the quantity of the commodity sold, the monopoly revenue will increase or decrease by an amount equal to this amount; therefore the selling price which before the change afforded the greatest monopoly revenue will also increase or decrease after the change. provide this income; therefore, this change will not induce the monopolist to change his course of production.Suppose, for example, that the sale of 1,200,000,000 cubic feet of gas annually at thirtypence per thousand feet yields a maximum monopoly revenue: suppose that the production cost of this quantity is equal to twenty-sixpence per thousand feet, and leave fourpence as The monopoly income of , that is, the monopoly income amounts to £20,000.This is its maximum: if the company charges a higher price, say, 31p per thousand feet, and can only sell 1.1 billion cubic feet of gas, they may have a monopoly of 4.2p per thousand feet Income, that is, a total of nineteen thousand two hundred and fifty pounds; and in order to sell 1.3 billion cubic feet of gas, they may have to reduce the price to say twenty-eightpence, and perhaps get three points per thousand feet The monopoly income of sixpence amounts to £19,500.Thus, they can get £750 more at thirtypence than thirty-onepence, and £500 more than twenty-eightpence.Suppose now that a fixed tax of £10,000 is levied on the Gas Company every year, regardless of the volume of sales.Their monopoly income would then be £10,000 at thirtypence, nine thousand two hundred and fifty at thirty-onepence, and nine thousand five hundred at twenty-eightpence. .So they will continue to price it at thirtypence.

The same applies to any tax or subsidy which is not proportionate to the total revenue of the industry, but to its monopoly revenue.For supposing the tax to be levied is not a fixed sum, but a certain percentage, say fifty per cent, of the monopoly revenue, the monopoly revenue of the company, if priced at thirty pence, will be £10,000, At thirty-onepence it would be £9,625, at twenty-eightpence it would be £9,750.So they will still continue to price thirtypence. Conversely, a tax proportional to output will induce the monopolist to reduce his output and raise his price.Because doing so can reduce his expenses.The excess of total revenue over total expenditure is thus increased by a reduction in output, though it may have decreased before the tax was imposed.Moreover, if the net revenues before taxes were only slightly greater than those afforded by much smaller sales, the monopolist would profit by greatly curtailing production; This will lead to a sharp drop in production and a sharp rise in prices.Such a change, which reduces the cost of operating a monopoly by an amount proportional to the monopoly output, would have the opposite effect.

For instance, in the last case, if the company priced at thirty-one pence per thousand feet, and sold gas, one and a half billion feet, the tax of twopence per thousand feet sold would reduce the revenue of the monopoly to £1083. If the price is set at 30 pence, the sales of 1.2 billion feet of gas will reduce the monopoly revenue to £10,000; Eight thousand six hundred and sixty-six pounds.This tax, therefore, must induce the Gas Company to raise their price above thirtypence; they may raise it to thirty-onepence; It is in their interest to clearly indicate to what extent it is in their interest.

On the other hand, if there is a subsidy of 2p for every thousand feet of gas sold, and if the gas company sets the price at 31p, the monopoly income will rise to 28,416 pounds; if the price is 30p , would rise to £30,000; if priced at twenty-eight pence, it would rise to £30,333.Therefore, subsidies will reduce their prices.Of course, a reduction of twopence per thousand square feet in the monopoly's cost of production by means of improved methods of gas production would have the same effect. Section 5. Monopolies are often able to maintain savings in business. If the monopoly produces such a large quantity of sales that its supply price (as stated above) equals its demand price, he loses all his monopoly revenue.The output that provides the greatest monopoly revenue is always substantially less than this amount.So on the surface, it seems as if monopoly output is always less than competitive output, and its price to consumers is always greater than competitive price.But it is not.

For if the production is in the hands of one person or firm, the total cost incurred will generally be less than if the same amount of production is distributed among many smaller production rivals.They are bound to compete with each other, so that the total cost of various advertisements must be much larger than that of a factory; they are not good at taking advantage of the various economies brought about by mass production.In particular, they cannot afford to improve the methods of production and the machinery used in their production as much as a single large factory, which knows that it must reap the full benefit of any improvement. This argument does assume that the plant is well run and has unlimited command over capital.This is an assumption not to be taken lightly.But if we can make this assumption, we can generally conclude that the supply price expressed by the supply schedule of non-monopoly products is higher than that expressed by our monopoly supply schedule; therefore, the equilibrium output of commodities produced under free competition less than that output at which the demand price equals the monopoly supply price. One of the most interesting and extremely difficult applications of the theory of monopoly is this question: Is it not in the public interest that best advances the interests of the public by dividing different districts into the major railroads, so as to exclude competition there?The proposition is that a railroad can carry two million passengers or two million tons of freight cheaper than one million.Allocating public demand to the two railroads will not allow each to provide cheap service.It must be admitted that, ceteris paribus, the "monopoly revenue price" imposed by a railroad will fall with each increase in the demand for its services.The opposite is true.But as human nature tends, experience has shown that the destruction of monopolies by the creation of competing routes hastened rather than hindered the discovery that the original route could transport at a lower rate.Moreover, there is a suggestion that the two railroads are soon to be combined, and that the public bear those charges for the double service.But this can only lead to new debates.The theory of monopoly raises rather than solves these practical problems, which we have to ignore. Section 6. A monopolist may lower his price for the sake of the future development of his enterprise, or out of a direct concern for the welfare of consumers. Above we assumed that the monopolist sets his commodity prices only from the current net income he can obtain from the monopoly.But in fact, even if he does not consider the interest of the consumer, he is likely to think that the demand for a thing depends very much on the habit of people to it; If this price increases his sales, the popularity of his goods will soon replace his present loss.The lower the price of gas, the greater the tendency of people to install gas; once it is installed, people will probably continue to use some gas even if electricity or oil secretly competes with it.A more obvious example is that of a railway company which has a de facto monopoly on transporting passengers and goods to a certain port or sparsely built suburb; the railway company may from a commercial point of view consider it worthwhile to charge a fare far below that which provides the maximum net revenue. in order to accustom the merchants to use the port, and encourage the local population to build docks and warehouses; or to help the speculative builders of the suburbs build cheap dwellings, and quickly accept tenants, thus giving the suburbs an early prosperity. atmosphere, which goes a long way toward ensuring its long-term success.The sacrifice of a portion of the present interests which a monopolist makes in order to develop future business differs only in degree, not in quality, from the sacrifice generally made by a new factory in order to establish commercial relations. In a case such as the above, a railroad company, though not daring to say that it has any altruistic motives, finds its own interests so closely related to those of its customers that it temporarily sacrifices some of its net income in order to increase the consumers' surplus. It is beneficial to it.The interests of producers and consumers are more closely related where a number of landowners in a certain district jointly build a branch railway through that district, without much hope that the investment of this railway in them will furnish the present rate of interest. (That is to say, not too much to hope that the monopoly income of the railway, as we have said, will not be a negative figure), but that the railway will increase the value of their estates so that their entire venture is a profitable venture.When a city engages in supplying gas, running water, or providing transportation facilities by building roads, bridges, and tramways, the question often arises whether the charges should be higher in order to provide a proper net income and reduce the burden of municipal taxes , or should be lower in order to increase consumer surplus. Section VII total interests, reconcile interests. Clearly, it is necessary to study the considerations by which a monopolist governs his actions on the assumption that he considers an increase in consumer surplus to be equally desirable to him even if there is no equal increase in his monopoly income. , but only by adding, say, a half or a quarter. If the consumer's surplus arising from the sale of the commodity at any price is added to the resulting monopoly revenue, the sum of the two equals the sum of the net benefits to producers and consumers together from the sale of the commodity. The monetary measure, or as we call it, the total benefit of the sale.If the monopolist regards the interest to the consumers as of equal importance to the equal interest to himself, he will strive to produce that output of commodity which maximizes this aggregate interest. But the monopolist seldom regards a pound of consumer surplus as desirable as a pound of monopoly income.Even a government which regards its own interest as coincident with that of the people is obliged to take account of the fact that, if it forgoes one source of revenue, it must generally refer to others which are themselves disadvantageous.For they will necessarily entail friction and expense of imposition, and some injury to the public, such as the loss of the consumer's surplus which we have mentioned.They can never be adjusted quite fairly, all the more so when taking into account the unequal shares of the benefits that different classes of society will receive by suggesting that the government give up some of its revenues.Suppose the monopolist makes a compromise and counts a pound of consumer surplus as monopoly revenue equal to, say, ten shillings.Suppose he calculates the monopoly revenue from the sale of his commodity at any given price, and if he adds to this revenue the corresponding half of the consumer's surplus, the sum of the two may be called the benefit in compromise; he will seek to determine A price that makes this benefit as large as possible. The following general results can be proved with precision; but on a little reflection their truth appears so obvious that it hardly requires proof. First, the quantity at which the monopoly is about to sell is greater (and the price at which it is sold at a lower price) when the monopolist intends more or less to promote the interests of consumers than when his sole object is to extract the greatest possible monopoly revenue; The greater the desire to advance the consumer's interest, that is, the greater the percentage by which he calculates the real value of the consumer's surplus and his own income, the greater will be the output (and the lower the selling price). The eighth section discusses the importance of statistical research on the law of demand and the law of consumer surplus to society. Some years ago, it was often said: "An English king who regards himself as the agent of his people should take care not to expend the energy of the people on the kind of work that is not worth his own labor, or translated into Mandarin. As a matter of fact, he does not engage in work which does not earn enough to cover his costs with interest".These words may sometimes mean nothing more than that a certain interest of the consumer in reluctance to purchase on a large scale at a high price exists, for the most part, only in the rhetoric of those who have a private interest in the work in question; But more often they may indicate a tendency to underestimate the consumer's interest in low prices (what we call consumer surplus). One of the major factors in the success of private enterprise is the ability to weigh the pros and cons of any approach and to discern their true relative importance.He who, by practice and genius, has learned to put the factors into their proper place, has acquired wealth; and the increase in the efficiency of our productive forces is due in large measure to the assiduous endeavor of many able men to acquire this entrepreneurial talent.But it is a pity that this kind of weighing of gains and losses is almost always based on one point of view, that of the producer; and there are not many people who weigh the relative interests of consumers and producers in various actions. .For it is true that only the direct experience of a few persons can obtain the necessary material, and even in the case of these few the material obtained is limited and incomplete.Moreover, when a great magistrate is as conscious of the public interest as able merchants are of their business, he is, in most cases, not free to carry out his plans.At any rate, in a democracy a grand project can hardly be carried out in a consistent manner unless its interests are made clear not only to the few who have direct experience of the public enterprise, but also to the many who do not. This kind of experience can be explained clearly by people who judge only by the materials provided by others. This kind of judgment is always inferior to the judgment made by the intuition of the able businessman with the help of his long experience in business.But judgments would be much more reliable if they could be drawn from statistics of the relative interests to which the various classes of society may arise from various public actions.Much of the failure and injustice of government economic policy is due to a lack of statistics.The minority who adhere to one side's interests continue to speak out; But the great majority of the masses, having their own interest in the opposite direction, are silent; for no one, if the matter had been more or less called to their attention, would want to work for a cause which is insignificant in itself.Thus the minority wins, even if the available statistics of interest show that the total interest of this minority is only one-tenth or one-hundredth of the total interest of the many silent. Undoubtedly, statistics are easily misinterpreted; and their initial application to new problems often leads to errors.But many of the ills of misusing statistics are obvious unless one takes pains to repeat them even when addressing a general audience. In general, arguments which can be reduced to statistical form (though still backward) gain more rapid acceptance than any other form of consensus among those who have studied the problems they discuss.The dramatic growth of collective interests, and the economic frenzy of collective action, make it imperative that we know what are the most desirable quantitative measures of public interest, and what are the statistics for them, and that we should proceed to get these statistics. There may be some reason to hope that, over time, consumption statistics will be organized so that the schedule of demand is sufficiently reliable to show, in a diagram as far as the eye can see, the amount of consumer surplus that will arise from various public and private actions. .By the study of these diagrams, one may gradually be able to correctly identify the relative amounts of benefit to society in the various schemes of public and private enterprise; sound theories may replace those traditional theories which, while they may have socially progressive, but social enthusiasm is cooled by skepticism about programs of public utility regardless of monetary gain.The practical significance of much of the abstract reasoning with which we have engaged above will not fully appear until the end of the book.But it seems expedient to introduce them in advance, partly because they are closely related to the main theories of the equilibrium of supply and demand, and partly because they serve to illustrate the nature of the discussion of the factors determining the distribution we are about to examine. Purpose. Section 9 The two complementary monopoly problems cannot be solved in general. The assumption above is that the monopolist can buy and sell freely.But in fact monopoly alliances in one branch of industry can encourage the development of monopoly alliances in those branches with which the industry has dealings.And the conflicts and alliances between monopoly organizations play an increasingly important role in modern economics.General abstract reasoning has nothing more to say on this subject.If two absolute monopolies complement each other, so that one cannot make good use of its product without the help of the other, there is no way to determine where the price of the finished product will be fixed.For example, if we follow Cournot's assumption that copper and zinc are useless unless they are mixed to make copperware, if we assume that A has all the sources of supply of copper, and B has all sources of supply of zinc.It would then be impossible to determine in advance how much bronze to produce, and therefore also the price at which it will be sold.Each seeks to take advantage of the other in the transaction; and though the outcome of the struggle may greatly affect the buyers, the buyers will not be able to influence the outcome. Under the assumed conditions, A cannot expect to gain all, or even any benefit at all, from the increased sales volume due to the lower copper price in a market where the zinc price is determined not by strategic bargaining but by natural causes . For if he lowers his price, B may regard this action as a sign of bad business and raise the price of zinc; thus A loses both in price and in sales.Each, therefore, seeks to intimidate the other; the consumers may find that there is less brass on the market, and thus be able to command a higher price than if a single monopolist owned the whole supply of copper and zinc.Because he may think that in the long run he can profit by low prices that stimulate consumption.But neither A nor B can foresee the consequences of their own actions unless the two come together to agree on a common policy, that is to say, unless they merge partly, perhaps temporarily, of their monopolies.From this, and from the tendency of several monopolies to disturb the industry concerned, it may be justified to maintain that the general interest of the public requires that monopolies which assist each other should be in the hands of a single person. But on the other hand, there are other considerations, perhaps even more important.Because in real life, the kind of permanent absolute monopoly mentioned above hardly exists.In the modern world, on the contrary, new things and methods are constantly tending to replace old things and methods which do not serve the interests of consumers; direct and indirect competition is likely to make one of the two complementary monopolies One species is more weakened in status than the other.For example, if in a small isolated village there is only one spinning mill and one weaving mill, it may, in the public interest, for a short time make both mills in the same hands.But it will be much more difficult to shake the monopolies thus established than their separate monopolies.For a new adventurer might enter the spinning business, and compete with the old mill for the customers of the old cloth mill. Again, look at the total distance between two great centers of industry, partly by rail and partly by water.If competition in railroads or waterways were never possible, it would perhaps be in the public interest that railroads and shipping lines should be in the same hands.But in practice such general conclusions are impossible to make.Under certain conditions it is more in the public interest that the railroads and the air lines be in the hands of one individual; And under other conditions, perhaps frequent, it is in the long run to be in the public interest that they should be in different hands. Likewise, arguments in favor of the consolidation of cartels or other monopolies in mutually supportive branches of industry, while often plausible and even persuasive on the surface, are generally unreliable on closer examination.Their purpose is to eliminate significant social-industrial dissonance; but that may come at the expense of greater and more persistent dissonance in the future.