This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 10. Types of monopoly-price: receipts vs. profits. These petty devices develop, in the case of larger markets and of many important articles of sale, into the systematic practice of manipulating prices artificially. The explanation of the motives and of the limits of monopolistic price-fixing would best be reserved in large part until a later stage of our study, where it can be considered in connection with enterprise. It is in the sale of the products of a business that the most important problems of monopoly are found. There the monopolist Is seeking the highest net gain over a considerable period in the sale of a continuous output of goods. The cost per unit is the minimum seller's valuation and the monopoly-price sought is that which in the long run yields the largest gain (the product of units of sales times margin of gain per unit). Let us here consider merely the case where the monopoly (seller or group of sellers) is seeking the maximum total price (not net gain) for a stock of goods which have no minimum seller's valuation. Such is the classic example of monopoly in colonial trade related by Adam Smith: "In the spice islands the Dutch are said to burn all the spiceries which a fertile season produces beyond what they expect to dispose of in Europe with such a profit as they think sufficient."4 "We may call this price which concerns the gross receipts from sales, crude monopoly-price. It is that which yields the monopolist (with complete control of supply) the maximum gross receipts.
This type of cases is of not infrequent occurrence. Such a case is presented whenever the unsold portion of a supply would go to waste, such as perishable goods after they have come to market (fruits, vegetables, etc.), such as vacant seats in an opera house, at athletic games, etc., where the expense of the whole performance has been incurred and will not be increased by more spectators. This control of all the seats at a single entertainment is a very restricted kind of monopoly, and does not present a social problem. There is still intense competition among artists of all kinds to provide entertainments having the merits to attract spectators.
§ 11. Uniform monopoly-price. In all such cases the competitive price would be fixed solely by the buyers' scale of valuation, as in an auction without reserve. If the supply of goods be large, approaching the saturation point of desires, whether there be one seller (without reserve valuation) or competing sellers, the price will tend toward the valuation of the marginal buyer, and in the extreme case may sink to zero. The only way sellers can prevent this is to reserve a part of the supply, even if it has to be burned up or thrown away (fish, fruit, etc.), or remains unused (as the empty seats in a theater). In the case shown (in Fig. 14 and the table) if there were 7 units for sale, the unit price would be 1, the total price 7, and each of the 7 sellers would get 1. But if the owners of these 7 units unite and withhold 3 units, the total receipts are 16, which divided equally, gives 22/7 units of price to each seller. It is a general truth, that monopoly power can be made effective to raise a uniform market-price above what it would be if the monopolists competed, only by artificially increasing scarcity, by limiting supply. Shown graphically, the maximum crude monopoly-price obtainable is always the largest rectangle that can be inscribed within the coordinate axes and the hypothetical demand-curve. (See above Chapter 4, Section 11, on the paradox of value.)
§ 12. Uniform monopoly-price, inelastic demand. With a more inelastic demand,5 where buyers' demand increases very little with a rapid fall in price, the monopolist must restrict his offers more narrowly to attain a total price above the competitive. In Figure 15 the offer of 3 units would at the price 6 yield the maximum proceeds (18), and any supply below that would be tapping only the lower levels of valuation. If a few valuations are high, and the others fall very rapidly, the price can be raised very much more; as in Figure 15, if the demand curve were AEFG the monopoly-price would be 9. This is the type of demand for articles of great luxury, limited to the very rich.
5 Note that as demand means number of units demanded, at a price, an elastic demand means a large change of demand with a small change in price. With given scales of price and of quantities of goods, the more elastic the demand, the flatter the demand-curve.
Fig. 14. Uniform Monopoly-price.
§13. Uniform monopoly-price: elastic demand. The more elastic the demand the more nearly a monopolistic price approaches a competitive price with a given number of units of supply. In Figure 14 it appears that with any number of units up to 4, the monopolistic and the competitive market-prices would be the same, and any restriction would involve a loss to the monopolist. The motive for monopoly lies in the range of supply of 5 units and beyond. With a more elastic type of demand as in scale A-B (in Figure 16) where there is less difference in the valuations of the most urgent (or capable) and of the less urgent buyer, competitive and monopolistic market-prices are the same up to 7 units (7 X 41/3 = 301/3 total). With a still more elastic demand represented by a more flattened curve, as in C-D of Figure 16, the competitive and monopolistic price are the same up to 11 units (11 X 31/3 = 36% total) and either 10 or 11 units will yield the same total. Beyond that is the region of possible monopolistic price. Com-pound types of demand scales, made up of different levels of demand, would further strengthen or weaken the motive to limit supply. If the demand curve, after rapidly falling, flattens to a new broad field of demand, a lower price will yield a larger total than the previous monopoly-price. This is the type of non-essential goods which remain luxuries when price is high, but rapidly become looked upon as comforts and necessities when price falls.
§ 14. Discriminatory monopolistic price. It appears from the foregoing that while it is possible for sellers to gain by the fixing of a uniform monopoly-price under some conditions, under other cases it is not. The range of this possibility is, indeed, much narrower than would be anticipated before a study of the problem.6 But where a monopoly exists, why should it confine itself to a uniform price to all buyers ? The very scrutiny of the differences in buyers' valuations needed to fix a monopoly-price, suggests making differences in prices. This fact of practical experience presents the problem of discriminatory monopoly-price. It may often happen that the whole group of would-be buyers may be divided into subgroups, and a different price made for each (see Figure 17). This division may correspond with differences in locality (geographical), as in railroad rates to different places, different prices of petroleum to different cities or states, or different rates to domestic and to foreign shippers on a railroad, etc. Or it may correspond with social ranks, as can be done by making slight differences in quality, the best quality at a very high price for the rich, and the common grades at low prices to the masses. Or it may correspond with the power of different buyers to substitute other goods, or to resort to a different source of supply, the poor in such cases being made to pay more than the rich. Or the distinction may be made with reference to the individual differences in maximum valuations,
6It must not be forgotten that our study thus far is limited to crude monopoly-price. The problem is different when it is one of profits resulting from the excess of price over cost of production. only to be known by intimate personal knowledge or by an elaborate system of espionage. This is the extremest possible discrimination.7
7 Thus where the uniform monopoly-price is 4 per unit, yielding proceeds of 16, a group discrimination such as shown in Figure 17, at the left, might yield 23, and personal discrimination, as shown at the right,
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