This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 1. Competition defined. § 2. Naturalness of competition. § 3. Conflicting interests of competition. § 4. Nature of monopoly. § 5. Monopoly not merely scarcity. § 6. Monopoly not merely superior economic power. § 7. Partial competition coexisting with monopoly. § 8. Absolute and relative monopoly. § 9. Motives and germs of monopoly. § 10. Types of monopoly-price: receipts vs. profits. § 11. Uniform monopoly-price. § 12. Uniform monopoly-price: inelastic demand. § 13. Uniform monopoly-price: elastic demand. § 14. Discriminatory monopolistic price.
§ 1. Competition defined. The word competition is frequently heard and with various implications. Literally it means "seeking-together," with the suggestion of rivalry, of mutual exclusion of the seekers. As applied to trade, competition means the attempt of two or more persons to get the same thing, each being guided by his own valuation and not restrained by any outside force. Thus there is an element of competition in the simplest case of barter, for whatever ratio is more favorable to one is less favorable to the other party and gives to one what the other fails to get. But the idea of competition more frequently is applied to a group of traders buying or selling the same class of goods. All the members of the group are thought of as being on one side of the trade, either the buyer's or the seller's side. If in such case there is on the other side but one trader (or some agreement or limitation of competition) there is one-sided competition. When there are two groups of competitive traders, one of buyers and one of sellers, there is two-sided competition.
§ 2. Naturalness of competition. Competition has been implied in previous chapters in such words as rivalry, emulation, bidding, least eager buyer, or seller, price-adjustment, etc. Competition is spoken of as a force raising or lowering prices, as a motive acting upon the traders, etc., but competition is not a different force, or a separate motive, apart from the desires of the traders. (Some minor exceptions occur where the motive is the mere wish to outdo for the fun of the game.) Rather competition ordinarily is but an expression for the situation where each trader is exercising his choice in a market without restraint from others of the same group. For unless there is introduced a new personal factor of collusion, conspiracy, agreement not to bid against each other, the market price will be competitive, and a condition of competition exist. Such agreements, being dependent always on the good faith of the parties, often also on secrecy, and being provocative of jealousies in the division of the gains, are dependent on personal factors, and create a more artificial state of price than is found in competitive price, which has a more impersonal character. Hence competitive prices have, since the days of Adam Smith, commonly been spoken of as "natural" prices. The word natural must, however, be used with caution. It can not be said that the choice any trader makes in entering into an agreement not to compete, when he sees that he can gain by so doing is, in one sense, any less "natural" than his choice of the thing when he competes. The choice might be called natural but the situation and the price resulting are not so, viewed from our present standpoint; they are artificial in the sense that they result from an agreement to abstain from the competition which otherwise would take place.
§ 3. Conflicting interests of competition. The buyers have the common interest of low prices; the sellers, the common interest of high prices; and buyers' interest as a group is opposed to sellers' interest as a group. The competition of interests is thus in two dimensions, but competition is applied particularly to the rivalry within the group on either side.
If there are more would-be buyers than sellers (or vice versa), some on the buyers' side will be forced out by the competition of the others; and even if the numbers are equal in each group, and all succeed in trading, it will probably be at a ratio altered by the competition. The presence of competing buyers, having different valuations, raises the price at which some sellers will be able to sell and, vice versa, the presence of competing sellers lowers the price which some buyers must pay.
Fig. 12. Traders' Interests with Respect to Price.
It would always be to the advantage of the traders on one side (say the sellers) if some of their number would cease to produce, or would produce less, as this would raise the price that those remaining could get. Sometimes the rise of price through decreased production is so great that the total price of the whole supply is greater than the total price of the larger supply (and vice versa, in case of increased production). This is the paradox of value applying to a whole market and to the buyers' curve of composite demand, rather than to the individual and to his valuation curve. For example, the total amount of money received by all the farmers of a country for a large crop of corn, wheat, tobacco, cotton, may be less than what would be received for a smaller crop. Abundance is good for the purchasers of farm products, but not. always advantageous to the farmers as a class. This appears in the comparison of amount produced, price per unit, and value of the total crop, in successive years; for example, of cotton in the United States. This phenomenon appears frequently in the case of many kinds of products. To the sellers it is very disagreeable to get less for a large crop than for a smaller one, and it constitutes a motive for attempting to control the prices to their own advantage whenever they can.
§4. Nature of monopoly. Monopoly is derived from the Greek roots, monos (sole, only) and polein (to sell), whence the abstract noun monopolia (exclusive power, or condition of sale). It originally meant the exclusive legal right of selling some article in some market. The typical monopoly of later medieval and early modern times was the power (or person or company granting it) granted in a patent by the sovereign. The name patent survives as the special name for the monopoly granted by law to an inventor. Patents and franchises of public corporations, such as street railways, etc., are the main modern forms of legal monopoly. The idea was extended in one direction to include the right to deal in some article, and has been extended in modern usage in another direction to mean economic power to become (within limits) the sole seller (or buyer) of an article, whether this power is derived from law or springs from the economic conditions. It is applied also to the group of persons, or to the business company or corporation, which has this power. Monopoly, therefore, is essentially opposed to competition, but only within a group on one side of the market, not in the market as a whole. It suggests always the limitation or absence of that rivalry within the group of buyers or of sellers, respectively, which constitutes competition.
* In nine changes that occurred (as compared with the preceding year) production and prices moved in opposite directions eight times, and in the other case (in 1910) price rose but little the same year that production increased a little. No doubt cotton prices would have been on a lower level the last few years (1909-1912) but for two factors: (1) The increasing scale of general prices due to gold production, and (2) the increasing population and the corresponding need for more cotton.