This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 4. Temporary and limited monopoly, and discrimination. The foregoing applies to uniform monopoly-price. This is sometimes the problem presented to the monopolist, as to the manufacturer of a patented article in determining the advertised price of an article. Even then, however, some variation in price may be made by paying freights, giving cut prices to wholesale dealers in some localities, because of distance, or of peculiar condition of competition with a similar article, or on the principle of dumping, etc. Again and again the monopolist is tempted to depart from the uniform monopoly-price - to maintain it within the range of monopoly power, but to cut it by successive reductions as the conditions shade off toward competition, as they always do, more or less.
If, however, the better quality or the particular thing needed is in the hands of one seller, there is a temporary and limited measure of monopoly. For example, a cabman's business as a whole is usually competitive, as any one is free to engage in it if profits seem high. (There are, however, cases of monopoly through exclusive rights to certain locations, etc.) But in many cases the cabman has a distinct bargaining advantage over a passenger, as when no other cab is in sight, or on a rainy day. However, it may not always be "good business" to yield to the temptation to get the higher price. In a small town where men know each other, the cab fares charged to residents are not often discriminatory, for regular patrons resent this and the cabman would lose patronage. The sole druggist in a small town might occasionally get very high prices from particular customers at times of illness, but he would thus drive away much of his custom, and would tempt a fairer and less grasping competitor to come in. Public opinion develops as to what is a fair price to be asked alike of all. The customary price has both a moral and a legal sanction. Thus, when men and capital are free to come and go, there results an average or normal return for ability and agents of a certain grade. Prices come to equilibrium and continue pretty regularly to be virtually competitive, for they are determined by forces of competition, ever ready to appear where charging more than a normal supply price yields more than ordinary returns to active investors.
§ 5. Theory of discriminatory monopoly-prices. That a field of monopoly exists may be very certain, when it may be very difficult to find just who are the buyers who could be charged a higher price, and just how to make them pay it. If, however, in the measure that it can be done, it is done, there results a series of prices; highest to those buyers in the field of monopoly, low in the field of competitive prices, and possibly still lower in a price-cutting, rate-war field, where the monopoly is striving to drive some competitors out of certain businesses. (See Figure 50.) Assuming that the normal unit cost is 4, we may find that it is possible for a monopoly to get for a part of its product prices varying from 5 to 9, while elsewhere, in the fields of its competitors, cutting prices down to cost or even below. As some of its competitors were driven out of their fields, the range of the monopoly's control of the market would gradually widen. The shape of the demand curve would thus change.
FIG. 50. PRICE Discrimination in the Field of Monopoly.*
* The monopoly-price figure represents at its left, in the region of higher price, that field within which the monopoly under the particular conditions has a certain degree of control, and at the right in the region of lower prices, the successive levels at which either substitutes would be adopted or competitors would come in and take away the trade.
The region from 12 to 15, would, as soon as competitors were ruined, be transferred to the other end of the diagram. Where prices had been very low they would become very high, and remain so indefinitely until competition again threatened.
Altho competitors see the lure of high profits, they fear the loss of their whole investment. Thus the threat of price cutting by the monopoly can paralyze potential competition for a long period following a price-war, as has often been shown by experience. The price-war policy should not be mistaken, as it often is, for typical competition, where the motive is to sell at a profit, however meager. The price-war policy is only undertaken to force a competitor to an agreement either to withdraw from the territory, or to maintain a higher scale of prices, or to sell out his business, etc. Usually selling at less than cost for a time is deliberately done with the purpose of selling at more than a normal profit later.
§ 6. Problem of the economy of large production. Size of the enterprise is a condition affecting unit cost in most important ways. There are in many cases advantages in large production; there are economies in large plants.3 We have already studied the principle of proportionality (Chapter 12) and have seen how the proper proportion of the various factors to each other within the enterprise must be maintained. But further, the industry as a whole may be in better or worse proportion to the outside conditions, to the size of the market which it has a chance to supply. There is here a problem of the most economic size for an enterprise. As the size of the whole enterprise grows, the various parts (factors and costs) of it must grow in some proportion, but not in precisely the same proportion. Some parts do not need to increase proportionally to the output of the plant, and herein lies the economy. The advantages of large production should not be assumed to be necessarily conditioned on monopoly control, even where monopoly is the only condition in which it seems that a large enough unit of enterprise can be secured to get the full economies of large production. In such cases the two problems coexist, but must be kept logically distinct if confusion is to be avoided.
* This often is spoken of as the "law of increasing returns," especially in manufacturing, and it is contrasted with the principle of diminishing returns which was believed to be peculiar to agriculture. This is an erroneous contrast. See note at end of ch. 34.
§ 7. Economy of labor in large production. The economy of large production is a particular case of the advantages of division of labor, and we need consider only a few of the features peculiar to it. There are certain technical advantages that are possible only by physical concentration; that is, by producing a large output in a single plant at one place. This makes possible the subdivision of tasks among a large number of men so that specialization of trades is carried to the furthest possible point of advantage. Each worker can become skilful at his work in less time, having but one thing to do, lower paid workers can be used on many parts of the work, and less time is lost in changing from one thing to another. Division of labor decreases in some ways the difficulty of supervision in larger factories, where the processes are divided, systematized, and made a matter of routine. The necessary inspection of the results is more rapid and easy. The lower cost of labor per unit of product in a large group as compared with a small group is especially noticeable in producing form-value. In certain cases it appeared that in making plows nine men working separately could average 66 plows each per year, while one hundred and eighty men working together will average 110 each per year, the output per man being increased 66% per cent. In a rifle-factory with a daily output of one thousand, three men could turn out the same product that required eight men in a factory with a daily output of fifty, an increase per man of 166% per cent.