ECONOMIC POWERS OF THE TRUST.
Sec. 1. _Power of a Monopoly over earlier or later Processes in
Production of a Commodity._
Sec. 2. _Power over Actual or Potential Competitors._
Sec. 3. _Power over Employees of a Trust._
Sec. 4. _Power over Consumers._
Sec. 5. _Determinants of a Monopoly Price._
Sec. 6. _The Possibility of low Monopoly Prices._
Sec. 7. _Considerations of Elasticity of Demand limiting Prices._
Sec. 8. _Final Summary of Monopoly Prices._
Sec. 1. It remains to investigate the actual economic power which a
"monopoly" possesses over the several departments of an industrial
society. Although the "trust" may be taken as the representative form
of monopoly of capital, the economic powers it possesses are common in
different degrees to all the other weaker or more temporary forms of
combination, and to the private business which, by the possession of
some patent, trade secret, or other economic advantage, is in control
of a market. These powers of monopoly may be placed under four heads
in relation to the classes upon whose interests they operate--(_a_)
business firms engaged in an earlier or later process of production;
(_b_) actual and potential competitors or business rivals; (_c_)
employees of the Trust or other monopoly; (_d_) the consuming public.
(_a_) The power possessed by a monopoly placed in the transport stage,
or in one of the manufacturing or merchant stages, to "squeeze" the
earlier or less organised producers, has been illustrated by the
treatment of farmers by the railways and by the Elevator Companies
and the Slaughtering Companies of the United States. The Standard Oil
Trust, as we saw, preferred, until quite recently, to leave the oil
lands and the machinery for extracting crude oil in the hands of
unattached individuals or companies, trusting to their position as the
largest purchasers of crude oil to enable them to dictate prices. The
fall in the price paid by the company for crude oil from 9.19 cents in
1870 to 2.30 in 1881, when the Trust was formed, and the maintenance
of an almost uniform lower level from 1881 to 1890, testifies to the
closeness of the grip in which the company held the oil producers; for
although improvements in the machinery for sinking wells and for
extracting oil took place during the period, these economies in
production do not at all suffice to explain the fall. Indeed, the
method of the company's transactions with the oil producers, as
described by their own solicitor in his defence of the Trust, is
convincing testimony of their control of the situation:--"When the
producer of oil puts down a well, he notifies the pipe line company (a
branch of the Trust), and immediately a pipe line is laid to connect
with his well. The oil is taken from the tank at the well, whenever
requested, into the large storage tanks of the company, and is held
for the owner as long as he desires it. A certificate is given for it,
which can be turned into cash at any time; and when sold it is
delivered to the purchaser at any station on the delivery lines."[138]
In similar fashion the Sugar Trust, before the competition of the
Spreckles refineries arose, controlled the market for raw sugar. Nor
was this power exercised alone over the producers of raw sugar. It
extended to dictating the price at which the wholesale grocers who
took from them the refined sugar should sell to their customers.[139]
This power of a monopoly is not merely extended to the control of
prices in the earlier and later processes of production and
distribution of the commodity. One of the most potent forms it assumes
in manufactures where machinery is much used is a control over the
patentees and even the manufacturers of machinery. Where a strong
Trust exists, the patentee of a new invention can only sell to the
Trust and at the Trust's price. Charges are even made against the
Standard Oil Trust and other powerful monopolies to the effect that
they are in the habit of appropriating any new invention, whether
patented or not, without paying for it, trusting to their influence to
avoid the legal consequences of such conduct. There is indeed strong
reason to believe that the irresponsible position in which some of
these corporations are placed induces them to an unscrupulous use of
their great wealth for such purposes.
Sec. 2. (_b_) Since the prime object of a Trust is to effect sales at
profitable prices, and prices are directly determined by the
quantitative relation between supply and demand, it is clearly
advantageous for a Trust to obtain as full a power in the regulation
of the quantity of supply as is possible. In order to effect this
object the Trust will pursue a double policy. It will buy up such
rival businesses as it deems can be worked advantageously for the
purposes of the Trust. The price at which it will compel the owners of
such businesses to sell will have no precise relation to the value of
the business, but will depend upon the amount of trouble which such a
business can cause by refusing to come into the Trust. If the
outstanding firm is in a strong position the Trust can only compel it
to sell, by a prolonged process of cutting prices, which involves
considerable loss. For such a business a high price will be paid. By
this means a strongly-established Trust or Syndicate will bring under
its control the whole of the larger and better-equipped businesses
which would otherwise by their competition weaken the Trust's control
of the market. A smaller business, or an important rival who
persistently stands out of the Trust, is assailed by the various
weapons in the hands of the Trust, and is crushed by the brute force
of its stronger rival. The most common method of crushing a smaller
business is by driving down prices below the margin of profit, and by
the use of the superior staying power which belongs to a larger
capital starving out a competitor. This mode of exterminating warfare
is used not merely against actually existing rivals, as where a
railway company is known to bring down rates for traffic below cost
price in order to take the traffic of a rival line, but is equally
effective against the potential competition of outside capital. After
two or three attempts to compete with Jay Gould's telegraph line from
New York to Philadelphia had been frustrated by a lowering of rates to
a merely nominal price, the notoriety of this terrible weapon sufficed
to check further attempts at competition. In this way each
strongly-formed Trust is able to fence off securely a certain field of
investment, thus narrowing the scope of use for any outside capital.
This employment of brute force is sometimes spoken of as "unfair"
competition, and treated as something distinct from ordinary trade
competition. But the difference drawn is a purely fallacious one. In
thus breaking down a competitor the Trust simply makes use of those
economies which we have found to attach to large-scale businesses as
compared with small. Its action, however oppressive it may seem from
the point of view of a weaker rival, is merely an application of those
same forces which are always operating in the evolution of modern
capital. In a competitive industrial society there is nothing to
distinguish this conduct of a Trust in the use of its size and staying
power from the conduct of any ordinary manufacturer or shopkeeper who
tries to do a bigger and more paying business than his rivals. Each
uses to the full, and without scruple, all the economic advantages of
size, skill in production, knowledge of markets, attractive
price-lists, and methods of advertisement which he possesses. It is
quite true that so long as there is competition among a number of
fairly equal businesses the consuming public may gain to some extent
by this competition, whereas the normal result of the successful
establishment of a Trust is simply to enable its owners to take higher
profits by raising prices to the consumer. But this does not
constitute a difference in the mode of competition, so that in this
case it deserves to be called "fair," in the other "unfair."
It is even doubtful whether such bargains as that above described
between the Standard Oil Company and the Railways, whereby a
discriminative rate was maintained in favour of the Company, is
"unfair," though it was underhand and illegal. In the ordinary sense
of the term it was a "free" contract between the Railways and the Oil
Company, and in spite of its discriminative character might have been
publicly maintained had the law not interfered on a technical point.
The same is even true of the flagrant act of discrimination described
by Mr. Baker:--"A combination among manufacturers of railway
car-springs, which wished to ruin an independent competitor, not only
agreed with the American Steel Association that the independent
company should be charged $10 per ton more for steel than the members
of the combine, but raised a fund to be used as follows: when the
independent company made a bid on a contract for springs, one of the
members of the Trust was authorised to under-bid at a price which
would incur a loss, which was to be paid out of the fund. In this way
the competing company was to be driven out of business."[140] These
cases differ only in their complexity from the simpler modes of
underselling a business rival. Mean, underhand, and perhaps illegal
many of these tactics are, but after all they differ rather in degree
than in kind from the tactics commonly practised by most businesses
engaged in close commercial warfare. If they are "unfair," it is only
in the sense that all coercion of the weak by the strong is "unfair,"
a verdict which doubtless condemns from any moral standpoint the whole
of trade competition, so far as it is not confined to competing
excellence of production.
The only exercise of power by a Trust or Monopoly in its dealings with
competing capital which deserves to be placed in a separate category
of infamy, is the use of money to debauch the legislature into the
granting of protective tariffs, special charters or concessions, or
other privileges which enable a monopoly company to get the better of
their rivals, to secure contracts, to check outside competition, and
to tax the consuming public for the benefit of the trust-maker's
pocket. Under this head we may also reckon the tampering with the
administration of justice which is attributed, apparently not without
good reason, to certain of the Trusts, the use of the Trust's money to
purchase immunity from legal interference, or, in the last resort, to
buy a judgment in the Courts.
How far the more or less definite allegations upon this subject are
capable of substantiation it is beyond our scope to inquire, but
certain disclosures in connection with the Tweed Ring, the Standard
Oil Company, the Anthracite Coal Trust, and other syndicates induce
the belief that the more unscrupulous capitalists seek to influence
the Courts of Justice as well as the Houses of Legislature in the
pursuance of their business interests.
Sec. 3. (_c_) The more or less complete control of the capital engaged in
an industry, and of the market, involves an enormous power over the
labour engaged in that industry. So long as competition survives, the
employee or group of employees are able to obtain wages and other
terms of employment determined in some measure by the conflicting
interests of different employers. But when there is only one employer,
the Trust, the workman who seeks employment has no option but to
accept the terms offered by the Trust. His only alternative is to
abandon the use of the special skill of his trade and to enter the
ever-swollen unskilled labour market. This applies with special force
to factory employees who have acquired great skill by incessant
practice in some narrow routine of machine-tending. The average
employee in a highly-elaborated modern factory is on the whole less
competent than any other worker to transfer his labour-power without
loss to another kind of work.[141] Now, as we have seen, it is
precisely in these manufactures that many of the strongest Trusts
spring up. The Standard Oil Company or the Linseed Oil Trust are the
owners of their employees almost to the same extent as they are owners
of their mills and machinery, so subservient has modern labour become
to the fixed capital under which it works. It has been claimed as one
of the advantages of a Trust that the economies attending its working
enable it to pay wages higher than the market rate. There can be no
question as to the ability of the stronger Trusts to pay high wages.
But there is no power to compel them to do so, and it would be pure
hypocrisy to pretend that the interests of the labourers formed any
part of the motive which led a body of keen business men to acquire a
monopoly. One of the special economies which a large capital possesses
over a small, and which a Trust possesses _par excellence_, is the
power of making advantageous bargains with its employees.
It is possible that a firm like the Standard Oil Trust may to some
limited extent practise a cheap philanthropy of profit-sharing in
order to deceive the public into supposing that its huge profits
enrich many instead of few. But there is no evidence that the
employees of a Trust have gained in any way from the economies of
industrial monopoly, nor, as we see, is there any _a priori_
likelihood they should so gain.[142]
But the practical ownership of its employees involved in the position
of a monopoly is by no means the full measure of the oppressive power
exercised by the Trust over labour. Since the means by which Trust
prices are maintained is the regulation of production, the interests
of the Trust often require that a large part of the fixed capital of
the companies entering the Trust shall stand idle. "When competition
has become so fierce that there is frequently in the market a supply
of goods so great that all cannot be sold at remunerative prices, it
is necessary that the competing establishments, in order to continue
business at all (of course, under perfectly free competition many will
fail), check their production. Now an ordinary pool makes provision
for each establishment to run in one of the two ways suggested.
Manifestly a stronger organisation like the Trust, by selecting the
best establishments, and running them continuously at their full
capacity, while closing the others, or selling them, and making other
use of the capital thus set free, will make a great saving. The most
striking example of this kind in the recent history of the Trusts is
furnished by the Whisky Trust. More than eighty distilleries joined
the Trust. Formerly, when organised as a pool, as has been said, each
establishment ran at part capacity, one year at 40 per cent., one year
at only 28 per cent. A year after the organisation of the Trust only
twelve were running; but these were producing at about their full
capacity, and the total output of alcohol was not at all lessened. The
saving is to be reckoned by the labour and running capital which had
formerly been employed in nearly sixty distilleries. It must be borne
in mind that on the product of these twelve distilleries good profits
were made on the capital represented in more than eighty plants. All
the greater Trusts, such as the Standard Oil, the Cotton Oil, the
Cotton Bagging, and the Sugar Trust, have followed this plan of
closing entirely the weaker establishments and running only the
stronger, thereby effecting a saving in capital and labour."[143]
Here we see a Trust exercising its economic power of regulating
production. That power, as we shall see below, is not merely confined
to closing the inferior mills in order that the same aggregate output
may be obtained by a full working of the more efficient plant. Where
over-production has occurred it is to the interest of the Trust to
lessen production. With this end in view it will suddenly close half
the mills, or works, or elevators in a district. The owners of these
closed plants get their interest from the Trust just as if they were
working. But the labour of these works suddenly, and without any
compensation for disturbance, is "saved"--that is to say, the
employees are deprived of the services of the only kind of plant and
material to which their skilled efforts are applicable. It is probable
that one result of the formation of each of these larger trusts has
been to throw out of employment several thousands of workers, and to
place them either in the ranks of the unemployed or in some other
branch of industry where their previously acquired skill is of little
service, and where their wages are correspondingly depressed. From the
account given above of the changes in organisation of production under
the Trust it might appear that the effect upon labour was not to
reduce the net employment, but to give full, regular employment to a
smaller number instead of partial and irregular employment to many,
and that thus labour, considered as a whole, might be the gainer. An
industrial movement which substitutes the regular employment of a few
for the irregular employment of many is so far a progressive movement.
But it must be borne in mind first that there is usually a net
reduction of employment, a substitution not of 50 workers at full-time
for 100 at half-time, but of 30 only. For not only will there be a
net saving of labour in relation to the same output, the result of
using exclusively the best equipped and best situated factories, but
since the Trust came into existence in order to restrict production
and so raise prices, the aggregate output of the business will be
either reduced or its rate of increase will be less than under open
competition. The chief economy of the Trust will in fact arise from
the net diminution of employment of labour. As the Trust grows
stronger and absorbs a larger and larger proportion of the total
supply for the market, the reduction of employment will as a rule
continue. Of course, if the scale of prices which the Trust finds most
profitable happens to be such as induce a large increase of
consumption, and therefore to permit an expansion of the machinery of
production, the aggregate of employment may be maintained or even
increased. But, as we shall see below, there is nothing in the nature
of a Trust to guarantee such a result. The normal result of placing
the ordering of an industry in the hands of a monopoly company is to
give them a power which it is their interest to exercise, to narrow
the scope of industry, to change its _locale_, to abandon certain
branches and take up others, to substitute machinery for hand labour,
without any regard to the welfare of the employees who have been
associated with the fixed capital formerly in use. When to this we add
the reflection that the ability to choose its workmen out of an
artificially made over-supply of labour, rid of the competition of
other employers, gives the Trust a well-nigh absolute power to fix
wages, hours of work, to pay in truck, and generally to dictate terms
of employment and conditions of life, we understand the feeling of
distrust and antagonism with which the working classes regard the
growth of these great monopolies on both sides of the Atlantic.
The following is a short summary of the findings of a Committee of
Congress with reference to the relations existing between the railroad
and coal companies which control the anthracite coal-fields in
Pennsylvania and the coal-miners:--"Congress has found (Document No.
4) that the coal companies in the anthracite regions keep thousands of
surplus labourers in hand to underbid each other for employment and
for submission to all exactions; hold them purposely ignorant when the
mines are to be worked and when closed, so that they cannot seek
employment elsewhere; bind them as tenants by compulsion in the
companies' houses, so that the rent shall run against them whether
wages run or not, and under leases by which they can be turned out
with their wives and children on the mountain-side in mid-winter if
they strike; compel them to fill cars of larger capacity than agreed
upon; make them buy their powder and other working outfit of the
companies at an enormous advance on the cost; compel them to buy coal
of the company at the company's price, and in many cases to buy a
fixed quantity more than they need; compel them to employ the doctor
named by the company and to pay him whether sick or well; 'pluck' them
at the company's store, so that when pay-day comes round the company
owes the men nothing, there being authentic cases where 'sober,
hard-working miners toiled for years, or even a lifetime, without
having been able to draw a single dollar, or but few dollars in actual
cash,' in 'debt until the day they died;' refuse to fix the wages in
advance, but pay them upon some hocus-pocus sliding-scale, varying
with the selling price in New York, which the railway slides to suit
itself; and most extraordinary of all, refuse to let the miners know
the prices on which their living slides, a 'fraud,'" says the report
of Congress, "on its face" (pp. 71 and 72). The companies dock the
miners' output arbitrarily for slate and other impurities, and so can
take from their men 5 to 50 tons more in every 100 than they pay for
(p. 76). In order to keep the miners disciplined and the coal market
under supplied, the railroads restrict work, so that the miners often
have to live for a month on what they can earn in six or eight days,
and these restrictions are enforced upon their miners by holding cars
from them to fill, as upon competitors by withholding cars to go to
market. (Document No. 4, p. 77.)
Labour organisations are forbidden, and the men intentionally provoked
to strike to affect the coal market. The labouring population of the
local regions, finally, is kept "down" by special policemen, enrolled
under special laws, and often in violation of law, by the railroads
and coal and iron companies, practically when and in what number they
choose, and practically without responsibility to any one but their
employers, armed as the Corporation see fit with army revolvers or
Winchester rifles, or both; made detectives by statute, and not
required to wear their shields, provoking the public to riot (pp. 9
and 93-98), and then shooting them legally. "By the percentage of
wages," says the report of Congress, "by false measurements, by rents,
stores, and other methods the workman is virtually a chattel of the
operator."[144]
Sec. 4. (_d_) Those who admit that a Trust is in its essence a monopoly,
and that it is able, by virtue of its position, to sell commodities at
high prices, sometimes affirm that it is not to the interest of a
Trust to maintain high prices, and that in fact Trusts have generally
lowered prices. We have here a question of fact and a question of
theory. Of these the former presents the greater difficulty. It seems
a simple matter to compare prices before and after the formation of
the Trust, and to observe the tendencies to rise or fall. This
comparison has been made in a good many cases, with the result that
some Trusts seem to lower prices, others to raise them. The growth of
the Standard Oil Company and the strengthening of its power was
attended, as we saw, by a considerable fall of price. So also we are
told respecting the Cotton Seed Oil Trust, formed in 1883, that
"during these four years the price of cotton seed oil fell more than
eight times as much as it did during the five years before the Trust
was formed."[145] The rates of the most absolute monopoly, the Western
Union Telegraph Company, are very little higher than those which
prevail in England, where the Government works the telegraph system at
a considerable loss each year. The Sugar Trust, on the other hand,
directly it was formed, raised prices considerably. The same is true
of several of the other most conspicuous combinations.
Now, it is argued, if it be admitted that prices have in fact fallen
under the administration of some of the strongest Trusts, it cannot be
maintained that Trusts have a tendency to raise prices. In reply, it
is pointed out that in almost all highly-organised modern industries
improved methods of production are rapidly lowering the expenses of
production and prices, and that therefore the statement that Trusts
tend to maintain high prices is quite consistent with the fact of an
absolute fall, the question at issue being whether the fall of prices
under the Trust was as great as it would have been under free
competition. Moreover, a comparison of dates appears to indicate that
the Trust's prices, as we saw in the Standard Oil Company, fluctuate
with the degree of their monopoly, falling rapidly under the pressure
of actual or threatened competition, rising when the danger is past.
Finally, opponents of the Trust allude to certain Trusts which, in
spite of the greater economies of production they possess, have raised
prices.
Excepting by the inverse and questionable method of arguing that the
high profits distributed by a Trust are themselves proof that prices
have not fallen as they would have fallen under free competition, it
is not possible to build a very convincing condemnation of the Trust
from statistics of price. And even when profits are high it is open to
the defenders of the Trust to maintain that they only represent the
saving of the cost of competition, and that if competition were
introduced the profits would be squandered in the struggle instead of
passing into the consumer's pocket.
It is only from a deductive treatment of the subject that we are able
to clearly convict the Trust of possessing a power over prices
antagonistic to the interests of the consuming public.
A Trust, or other company, or a single individual who has a complete
monopoly of a class of goods for which there is a demand, will strive
to fix that price which shall give him the largest net profit on his
capital. The question with him will be simply this, "How many articles
shall I offer for sale?" If he offers only a small number the
competition of more urgent wants among the consumers will enable him
to sell the small number at a high price. Assuming, for the moment,
that the production of these articles was subject to the law of
constant returns--_i.e._, that a few things were produced relatively
as cheaply as many, this small sale would give the highest rate of
profit on each sale, for the "marginal utility" of the supply would be
high and would enable a high price to be obtained for the whole
supply. But if he possesses large facilities of production it may pay
him better to sell a larger number of articles at a lower price with a
lower rate of profit on each sale, because the aggregate of a larger
number of small profits may yield a larger net profit on his whole
capital. How far it will pay him to go on increasing the supply and
selling a larger number of articles at a lower price will entirely
depend upon the effect each increment of supply exercises upon demand,
and so upon prices and profits. Everything will hinge upon the
"elasticity of demand" in the particular case. If the object of the
monopoly satisfies a keen, widely-felt want, or stimulates a craving
for increased consumption among those who take off the earlier supply,
a large increase in supply may be attended by a comparatively small
fall in prices. Sometimes a large increase of supply at a lowered
price will, by reaching a new social stratum, or by forcing the
substitution of this article for another in consumption, so enlarge
the sale that though the margin of profit on each sale is small, the
net profit on the whole capital is very large. In all such cases of
great elasticity it may pay a monopolist to sell a large number of
articles at a low price.
Where the article belongs to that class in which the law of increasing
returns is strongly operative--_i.e._, where great economies in
expenses of production attend a larger scale of production, this
increase of supply and fall of prices may continue with no assignable
limit. On the other hand, where there is little elasticity of demand,
where an increase of supply can be taken off only at a considerable
fall of price, it will probably pay a monopolist to restrict
production and sell a small number of articles at a high price. It is
this motive which often induces the destruction of tons of fish and
fruit in the London markets for fear of spoiling the market. These
goods could be sold at a sufficiently low price, but it pays the
companies owning them to destroy them, and to sell a smaller number
which satisfies the wants of a limited class of people who "can afford
to pay." Now, when free competition exists among sellers, as among
buyers, this can never happen. It will always be to the interest of a
competing producer or dealer to lower his price below that which would
yield him the largest net profit on his capital were he a monopolist.
If he is a monopolist he will only lower his prices provided the
elasticity of demand in the commodity in question is so great that the
increased consumption will be so considerable as to yield him a larger
net profit. But if he is a competing dealer he does not look chiefly
to the consumption of the community, but to the proportion of that
consumption which he himself shall supply. The elasticity of demand,
so far as his individual business is concerned, is not limited to the
amount of the increased consumption of the community stimulated by a
lowering of prices, but includes that portion of the custom of his
rivals which he may be able to divert to himself. Hence it arises that
under free competition it will be the tendency of the several
competitors to drive down the prices to the point at which the most
advantageously placed competitors make the minimum profit on their
capital.
Sec. 5. It is all important to an understanding of the subject to
recognise that a monopoly price and a competitive price are determined
by the operation of an entirely different set of economic forces. The
loose opinion that it must be to the interest of a Trust or other
monopoly to sell at the same price as would be fixed by competition is
quite groundless.
Let us look more closely at the determinants of a monopoly price.
Suppose we are dealing with a Trust owning a large amount of fixed
capital, some of it more and some less favourably ordered for
production, and having an absolute monopoly in the market for steel
rails, cotton bagging, or other manufactured articles. First look at
expenses of production. A very small output, though produced by the
exclusive use of the very best machinery and labour, would not be
produced very cheaply, because the economies attending large-scale
production would be sacrificed. Each successive increment in output
would involve a decreased expense per unit of production so long as
the most favourably situated plant was employed. If the output grew so
large that worse material or works fitted with inferior plant, or less
favourably placed, were called into requisition, the economies of an
increased scale of production would be encroached upon by this
lowering of the margin of production. Taking the Trust's capital at a
fixed amount, there would necessarily come an increment of output
which it would not pay to produce even if sold at the price fetched
by the previous increment. The ton of steel or of cotton bagging which
would only yield a bare margin of profit, if sold at the price fetched
by the last ton, limits the maximum output of the business. Under the
pressure of free competition this marginal ton will be actually
produced. But though, considered by itself, it yields a margin of
profit, it will rarely if ever be produced as part of the actual
output of a Trust. The actual output of a Trust, we shall find, will
be determined at any point between the first unit of output and this
marginal increment. The expenses of production will not increase in
any close correspondence with the growth of the output, but will
represent the fluctuating resultant of the several economies of
production at the several points.
[Illustration: CURVE OF PROFIT IN TRUST.]
In the figures A and B the perpendicular line _ai_ represents a number
of increments of production. The expense of producing a supply of 100
will be measured by the line _bb'_, that of producing 200 by _cc'_,
and so on. But never in actual industry will the lines of growing
expense be regular in their relation to the increase of production, as
would be the case in the figure A; they will always be irregular, as
in the figure B. The curve of expense _ai'_ in the figure B will be
determined by the resultant of the various forces which make for
increasing and diminishing returns for each new increment of the
requisites of production required to produce the new portion of
output. When the increased scale of production makes some new
application of machinery economically possible, or where recourse must
be had to some decidedly inferior land for the raw material, a large
sudden irregularity may show itself in the curve of expense.
When we turn from expenses of production to the aggregate takings from
the sale of the several quantities of supply, we shall find a similar
irregularity of increase. Elasticity in demand, as tested by the
stimulus given to consumption by a fall of price, differs not merely
in different commodities, but at different points in a falling scale
of prices. A number of equal decrements in price, according as they
stimulate the satisfaction of weaker wants of earlier consumers, or
strike into new classes of consumers, or supply new kinds of wants,
will have widely different effects in increasing the aggregate
takings.
We have then two widely fluctuating and highly irregular gradations of
money terms, representing expenses of production and the aggregate
price of the various quantities of supply, each determined by a wholly
different class of considerations. But the interest of a Trust, as we
see, lies in fixing supply at the highest net profits. Now the net
profits of producing and selling any specified quantity of supply are
ascertained by deducting the expenses of production from the aggregate
takings. The relation between the growth of expenses of production and
of aggregate takings will yield a different net amount of profit at
each increment of supply. The diagram opposite will illustrate the
nature of these relations.
AL is the line indicating at the several points, B, C, D, etc.,
proportional increments in supply. If the monopoly be a steel rail
trust, B marks the millionth ton, C the two millionth ton of output,
and so on. A'L' is a curve indicating, by its diminishing distance
from AL, the diminishing expense of producing each unit of the
increased output, so that the expense of producing the first ton, if
only one is produced, is AA', that of the millionth ton, if one
million are produced, BB', and so on. The expenses of producing one
million tons will thus be represented by the figure ABB'A', those of
two millions by the figure ACC'A'. Further, let the curve _al_
represent, by its diminishing distance from AL, the diminishing price
at which the several additions to supply can be sold, so that the
first ton sells at A_a_, the millionth at B_b_, and so on, the
aggregate price of the first million tons being AB_ba_, that of the
first two millions being AC_ca_.
[Illustration: DIAGRAM OF TRUST PRICES.]
Assuming that the Trust is planning a new business and determining the
most profitable output, it will limit that output not necessarily at
the point where the selling price gives the widest margin of profit
upon the expenses of production, as might be the case at the point B
in the diagram, but at the point F, where the margin of profit bears
the largest proportion to the expenses of production, or in other
words, where the area of absolute takings shows the largest surplus
over the area of aggregate expenses. Thus it will here be to the
interest of the Trust to produce and sell six millions (limiting
production at F) with an aggregate expense AFF'A' and an aggregate
takings AF_fa_, yielding an aggregate net profit A'F'_fa_. They will
not produce five millions because the figure AE_ea_ bears a smaller
proportion to AEE'A' than does AF_fa'_ to AFF'A'. For a similar reason
they will not produce seven millions.
Since the fluctuations in the curve of expenses and in that of selling
price or "demand" are determined by an entirely different set of
forces, it will be evident that there may be several points in AL
where the proportions between the area of expenses and that of profits
may be the same. So there may be several maxima at which Trust prices
may be indifferently fixed. The figure upon F'_f_ may have the same
quantitative relation to the figure upon FF', as that upon H'_h_ to
that upon HH'. In such a case it will be a matter of indifference to
the Trust whether it sells five million tons at a price 100s. per ton,
or seven millions at 90s.
We have seen that the causes which determine expenses at the several
points in A'L' have no relation to the causes which determine the
selling price at the various points, except to furnish a minimum below
which the price cannot fall. Above this limit expenses of production
in no sense help to determine monopoly prices; the true determinants
are entirely in the region of demand, and are measured by the marginal
utility or satisfaction afforded to consumers by the several
quantities which constitute supply at any given time.
Since expenses of production always enter into the determination of
competition-prices, which are fixed by the interaction of expenses and
money estimates of utility--_i.e._, by supply and demand, it is
evident that the curve of monopoly prices has no assignable relation
whatever to the curve of competition prices, and that the most
profitable output and prices of Trust-made goods are in no way
identified with the most profitable output and prices in a
competitive trade. In competition the curve of selling prices tends to
follow closely the curve of expenses, and consequently the areas of
profits and expenses tend to bear the same proportion to each other at
different points of increment in the trade. For if at any point great
increases in economy of production are achieved, while the large
elasticity of demand maintains a price nearly the same as before, the
wide margin of profit which might fix the actual price at that point
for a monopolist only serves to stimulate such increased output on the
part of trade competitors as will continue until the flexibility of
demand weakens, and prices are lowered to such a point as will yield
the normal margin or market rate of profit.
There is, therefore, nothing in common between competition prices and
monopoly prices for different quantities of supply, nor anything to
secure that the actual quantity of supply and the price shall be the
same in the two cases.
Sec. 6. It is, however, conceivable that in a certain commodity where a
genuine monopoly holds the market, the price should be as low as under
free competition. This may be illustrated by the following curves of
expense and price:--
[Illustration]
where the economies of increased production continue to be very great,
while the flexibility of demand is also high. In other words, it may
pay the Trust better to make very large sales at a low price when the
expenses of production are low, than to sell a smaller quantity at a
higher price and with a higher expense of production. In this case the
consumer may get a part of the advantage of large-scale production
along with the saving of expense of competition. There is, however, no
guarantee to society that low prices will be fixed. In the vast
majority of cases it will probably pay the Trust better to limit
production and sell at higher prices.
In the illustration above we have assumed that a monopoly was starting
_de novo_. Where a Trust is formed, as is commonly the case, by an
amalgamation of existing capitals largely embodied in plant and
machinery of production, it will probably not pay to limit production
to a very small output, even though the largest proportionate margin
of profit might seem to stand there. For the interest upon the closed
mills and other idle capital should be reckoned among the expenses of
production for the purposes of determining the profitable price. Thus
where large means of production are owned by a monopoly it will seldom
pay to sell a very small supply at a very high price.
So far we have treated of absolute monopolies, eliminating all
consideration of competition. We have found that the supply and the
price of an article of absolute monopoly is determined by the relation
between expenses of production and flexibility of demand. Although a
new invention or a wide expansion of market may alter so considerably
the expenses of production of the several quantities of supply as to
materially affect monopoly-supply and prices, it is the latter
influence, that of flexibility of demand, that directly in each
specific case determines whether a Trust's prices shall be high or
low. When we find the Standard Oil Trust maintaining a low level of
prices, or the Western Union Telegraph Company charging low rates, we
shall find the explanation in the character of the public demand for
oil and telegraphic messages.
Sec. 7. A number of considerations relating to "demand" limit the
economic power of monopolies to charge high prices.
A monopoly price, as we have seen, exactly measures the marginal
utility of the supply, as indicated by the quantity of money which the
purchaser of the last increment of supply is just willing to pay for
it. When this marginal utility sinks fast with an increase of supply
the monopoly price will be high for it, and it will pay the monopolist
better to restrict the output and sell the limited supply at a high
price, because a large reduction of price will not stimulate a
proportionably large increase of consumption. So where the marginal
utility sinks slowly, it will pay to increase the supply and lower the
price, for each fall of price will stimulate a large increase of
consumption.
Since the marginal utility of a number of increments of supply will
not be the same in the case of any two commodities, it is evident that
the determination of monopoly prices is a very delicate operation.
It is not possible to present even an approximately accurate
classification of commodities in relation to the powers of a Trust or
Monopoly. But the following considerations will assist us to
understand why in some cases a Trust appears to raise prices, in
others to keep them as they were, and in others even to lower them:--
(_a_) The urgency of the need which a commodity satisfies enables the
monopolist to charge high prices. Where a community is dependent for
life upon some single commodity, as the Chinese on rice, the
monopolist is able to obtain a high price for the whole of a supply
which does not exceed what is necessary to keep alive the whole
population. Thus a monopolist of corn or rice in a famine can get an
exorbitant price for a considerable supply. But after the supply is
large enough to enable every one to satisfy the most urgent need for
sustenance, the urgency of the need satisfied by any further supply
falls rapidly, for there is no comparison between the demand of famine
and the demand induced by the pleasures of eating.
A monopoly of a necessity of life is therefore more dangerous than any
other monopoly, because it not merely places the lives of the people
at the mercy of private traders, but because it will generally be the
interest of such monopolists to limit supply to the satisfaction of
the barest necessaries of life.
Next to a necessary in this respect will come what is termed a
"conventional necessary," something which by custom has been firmly
implanted as an integral portion of the standard of comfort. This
differs, of course, in different classes of a community. Boots may now
be regarded as a "conventional necessary" of almost all grades of
English society, and a monopolist could probably raise the price of
boots considerably without greatly diminishing the consumption. Half a
century ago, however, when boots were not firmly established as part
of the standard of comfort of the great mass of the working classes,
the power of a monopolist to raise prices would have been far smaller.
As we descend in the urgency of wants supplied we find that the
comforts and luxuries form a part of the standard of life of a smaller
and smaller number of persons, and satisfying intrinsically weaker
needs, are more liable to be affected by a rise of price.
(_b_) Closely related to this consideration, and working in with it at
every point, is the question of the possibility of substituting
another commodity for the one monopolised. This everywhere tempers the
urgency of the need attaching to a commodity. There are few, if any,
even among the commodities on which we habitually rely for food,
shelter, clothing, which we could not and would not dispense with if
prices rose very high. The incessant competition which is going on
between different commodities which claim to satisfy some particular
class of need cannot be got rid of by the monopoly of one of them.
This is probably the chief explanation of the low prices of the
Standard Oil. As an illuminant, oil is competing with gas, candles,
electricity, and unless the monopoly were extended laterally so as to
include these and any other possible illuminants, the Trust's prices
cannot be determined merely by the pressure of the need for artificial
light. Though to a modern society artificial light is probably even
more important than sugar, a Sugar Trust may have a stronger monopoly
and be able to raise prices higher than an Oil Trust, because the
substitutes for sugar, such as molasses and beetroot, are less
effective competitors than gas, candles, and electricity with oil.
The power of railway monopolies largely depends upon the degree in
which their services are indispensable, and no alternative mode of
transport is open. Sometimes, however, they miscalculate the extent of
their power. The high railway rates in England have recently led in
several quarters to a substitution of road and canal traffic in the
case of goods where rapidity of conveyance was not essential. So also
in other cases sea-transport has been substituted.
The stronger monopoly of American railways consists partly in the fact
that distances are so great, and the sea-board or other water
conveyance so remote, that over a large part of the Continent the
monopoly is untempered by alternative possibilities of transport.
The reverse consideration, the possibility of substituting the article
of monopoly for other articles of consumption, and so securing a wider
market, has quite as important an influence on prices. The possibility
of substituting oil for coal in cooking and certain other operations
has probably a good deal to do with the low price of oil. A Trust will
often keep prices low for a season in order to enable their article to
undersell and drive out a rival article, a competition closely akin to
the competition with a rival producer of the same article. When
natural gas was discovered in the neighbourhood of Pittsburg, the
price was lowered sufficiently to induce a large number of factories
and private houses to give up coal and to burn gas. After expensive
fittings had been put in, and the habit of using gas established, the
Gas Company, without any warning, proceeded to raise the rates to the
tune of 100 per cent. When we ascend to the higher luxuries, the
competition between different commodities to satisfy the same generic
taste, or even to divert taste or fashion from one class of
consumption to another class, is highly complicated, and tempers
considerably the control of a Trust over prices.
The power of a company which holds the patent for a particular kind of
corkscrew is qualified very largely not only by competition of other
corkscrews, but by screw-stoppers and various other devices for
securing the contents of bottles. The ability to dispense with the
object of a monopoly, though it does not prevent the monopolist from
charging prices so much higher than competition prices as to extract
all the "consumer's rent," of the marginal consumer, forms a practical
limit to monopoly prices.
(_c_) Lastly, there is the influence of existing or potential
competition of other producers upon monopoly prices. Where prices and
profits are very high a Trust is liable to more effective competition
on the part of any surviving independent firms, and likewise to the
establishment of new competitors. This ability of outside capital to
enter into competition will of course differ in different trades.
Where the monopoly is protected by a tariff the possibility of new
competition from outside is lessened. When the monopoly is connected
with some natural advantage or the exclusive possession of some
special convenience, as in mining or railways, direct competition of
outsiders on equal terms is prohibited. Where the combination of large
capital and capable administration is indispensable to the possibility
of success in a rival producer, the power of a monopoly is stronger
than where a small capital can produce upon fairly equal terms and
compete. If the monopoly is linked with close personal qualities and
with special opportunities of knowledge, as in banking, it is most
difficult for outside capital to effectively compete.
Sec. 8. These considerations show that the power of a Trust or other
monopoly over prices is determined by a number of intricate forces
which react upon one another with varying degrees of pressure,
according as the quantity of supply is increased or diminished. But a
Trust is always able to charge prices in excess of competitive prices,
and it is generally its interest to do so. It will commonly be to the
interest of a Trust or other monopoly to maintain a lower scale of
prices in those commodities which are luxuries or satisfy some less
urgent and more capricious taste, and to maintain high prices where
the article of monopoly is a common comfort or a prime necessary of
life for which there is no easily available substitute.
FOOTNOTES:
[138] S.C.T. Dodd, _The Forum_, May 1892.
[139] "Trusts in the United States," _Economic Journal_, p. 86.
[140] Baker, _Monopolies and the People_, p. 85.
[141] Cf. Chapter ix.
[142] Mr. George Gunton, in writing upon "The Economic Aspect of
Trusts" (_Political Science Quarterly_, Sept. 1888), claims a rise in
wages as one of the advantages of Trusts, but Mr. Gunton throughout
his argument assumes that a Trust is a large competing capital and not
a monopoly. If a Trust were a competing capital its formation would be
an economic and social advantage, tending, as he says, "to increase
production, to lower prices, and to raise wages." But as a Trust is
not a competing capital it does none of these things.
[143] J.W. Jenks, "Trusts in the United States," _Economic Journal_,
vol. ii. p. 80.
[144] H.D. Lloyd, Essay on "Trusts," reprinted in _Boston Daily
Traveller_ (June 16, 1893).
[145] G. Gunton, _Political Science Quarterly_, Sept. 1888. This
statement, however, appears in contradiction to the "Report of the
Committee on Investigations relative to Trusts in the State of New
York," p. 12.