The Meanings of Monopoly; H. Fleming

CHARLES L. DODGSON, English mathematician PERHAPS there is an important word somewhere in the English language that is used as loosely as "monopoly." But it would be hard to find. Yet this word - with its deriva tives, "monopolize," "monopo listic," "monopoly power," and so on - is basic to orthodox economic theory. And there is scarcely any aspect of the American industrial economy to which the economists Mr. Fleming, for many years New York Business Correspondent of the Christian Sci ence Monitor, is a prominent freelance writer on business and economics. haven't applied this general con cept through one or other of the variety of meanings they have given it. Though the overtones and con notations of "monopoly" are, strangely, all to the bad, Ameri can business could shrug this off if it were not for one fact. The academic economists have, through the Federal Trade Commission and the Antitrust Division of the U. S. Department of Justice, sold their ideological jargon to the Federal courts. In the 1960's, with 681 682 THE FREEMAN November alarming speed, the U. S. Supreme Court has frankly begun to cite economic theory as a basis for its antitrust decisions, rather than legal precedents.

And "monopolizing," "attempt ing to monopolize," "conspiring to monopolize," or possessing "monopoly power," can be crimes under the Sherman Act. So the free-wheeling use of the words by the economists can spell trou ble for any business - at least of any size and financial strength. "Single Seller"? By its etymology, from its Greek roots, "monopoly" means "one seller;" or "single seller," or "sole seller" - just as "monotone" means one tone, "monorail" one rail, and so on through such words as monogamy, monologue, mono plane, and monomania. Historical ly, this was its original meaning; and in the case of the Elizabethan, Stuart, and Hanoverian monop olies, there was an "or else. . ." implied. The early monopolies were legally enforced; they were exclusive grants. (Those were monopolies - lit eral and legal - that contributed to the exodus of Puritans from England to Boston; to the English Civil War in the 1640's; to Adam Smith's diatribes in his Inquiry into the Wealth of Nations; and to the American Revolution.) II Monopoly" =Size?

But in the late nineteenth cen tury the word "monopoly" was cut loose from its etymological moorings. It was used synony mously with "trust" and "com bine." As Supreme Court Justice Holmes put it in his dissent in the Northern Securities case in 1903 ... it has occurred to me that it might be that when a combination reached a certain size it might have attributed to it more of the char acter of a monopoly, merely by vir tue of its size, than would be at tributed to a smaller one. 193 U. S., at 407 Thus the Standard Oil Company never did more than 90 per cent of the nation's kerosene business. Over the decades the meaning of the "mono-" in "monopoly" has been considerably further diluted. A 104-page draft complaint is on file in the Antitrust Division against General Motors Corpora tion, charging that it "monopolizes the manufacture, sale, and dis tribution of automobiles." GM's "market penetration" usually runs 50-55 per cent. An antitrust ex pert recently remarked that "mo nopoly is a matter of degree .... "

(Edward S. Mason, in Monopo listic Competition Theory, John Wiley, 1966, p. 80) The classic statement of this looser meaning for monopoly was that of Judge 1968 THE MEANINGS OF "MONOPOLY" 683 Learned Hand in the Alcoa case. He said that 90 per cent "is enough to constitute a monopoly; it is doubtful whether 60 or 64 per cent would be enough; and certainly 33 per cent is not .... " (148 F.2nd 416) (1945) His percentages, incidentally, were based on the three separate choices of relevant maTket available in the case.) Of far more fundamental im portance, however, in the econ omists' historic recoinage of "monopoly," has been their equat ing, since the 1880's and 1890's, of today's unprotected monopoly, with the legally protected monop olies of the sixteenth through the eighteenth centuries. The differ ence is as important as the differ ence between the former mer cantilist systems and modern cap italism. If it isn't important, Adam Smith wasted over 25 years on his Wealth of Nations.

(Of course it might be said that even in those earlier days, hardly anyone ever had a real "100 per cent" monopoly. But in those days the irrepressible price-cut ting competitor had to be a law breaker-usually a smuggler.) II Monopolistic Competition II But the really skillful semantic treatment of "monopoly" came in the early 1930's. Harvard Profes sor Edward H. Chamberlin's Theory of Monopolistic Competition was a tremendous success in the Washington and academic worlds, and subsequently went through six editions with scarcely a change. The book put into circulation two now fashionable notions - "mo nopolistic competition," and "joint monopolization" ("oligopoly"). Chamberlin went back to the pure meaning of "monopoly" that is, sole seller. He then pointed to the obvious fact that, in this sense, everybody has a "monopoly" of his own location, reputation, brand, personality, and so on whatever is unique about his prod uct or service. Thus all forms of "product differentiation" were "monopolistic."

With differentiation appears mo nopoly, and as it proceeds further, the element of monopoly becomes greater .... ... Where there is any differentia ation whatever, each seller has an absolute monopoly of his own prod uct, but is subject to the competition of more or less imperfect substitutes. (italics added) Since each is a monopolist and yet has competitors, we may speak of them as "competing monopolists," and of the forces at work as those of "monopolistic competition." Theory of Monopolistic Competition, 1st Edition, 1933, page 9. Since modern business competi tion is very largely waged in the form of product improvement, 684 THE FREEMAN November quality, reputation, service, and other non-price forms, this amounted to an intellectual judo, in which the business community's greatest competitive strength was converted to an all-out polemical weakness. But Chamberlin went considerably further than that.

He wrapped up "monopolistic com petition" with an extraordinary conglomeration of other factors and said the result was excess in dustrial capacity. Included in this conglomeration were ... formal or tacit agreements, open price associations, trade association activities in building up an esprit de corps, "price maintenance," the imposition of uniform prices on dealers by manufacturers, and ex cessive differentiation of product in the attempt to turn attention away from price. . . . (p. 106) Also "business or professional 'ethics,'" the disguising of price cuts, and "custom or tradition." "The common result of this as semblage," he said, "is excess productive capacity ... perma nent and normal ... and the result is high prices and waste ... These are wastes of monopoly - of the monopoly elements in monopolistic c01npetition." (p. 109) (italics added) "Joint Monopolization" But a much greater impact was achieved by this modest-sounding book through its developing of the theory of "oligopoly."l This theory says that where a few firms do most of the business in a given industry, they keep prices up for fear of price wars, and so work like a joint monopoly.

Said Chamberlin: Since the result of a cut by any one is inevitably (sic) to decrease his own profits (sic), no one will cut, and, although the sellers are entirely independent, the equilibrium result is the same as though there were a monopolistic agreement between them .... No one will cut from the monopoly figure because he would force others to follow him, and thereby work his own undoing .... (pp. 48, 49) Thirty years later, the Supreme Court, in vetoing a merger of large banks, said: That "competition is likely to be greatest when there are many sel lers, none of which has any signifi cant share," is common ground among most economists. . . . u. s. vs. Philadelphia National Bank, 374 U. S. 321 (1963) In this decision the Court was relying on the Chamber lin theory of "oligopoly," or joint monopoli zation. Thus, in a generation the con1 Chamberlin uses the word "oligop oly" on page 8 of his first edition, writ ten in 1932, and states in a footnote: " ... as to the word 'oligopoly,' I have never seen it in print ..•."

1968 THE MEANINGS OF "MONOPOLY" 685 cept had moved from the ivory towers of Harvard to the august chambers of the Supreme Court. Totting up all these meanings for "monopoly," we now have five: 1 - an exclusive Crown grant; 2 - a sole producer, but without government protection; 3 - a "dominant" or large pro ducer; 4 - a unique selling point (brand, reputation, location, skill, selling method, or oth er peculiarity) ; 5 - a lack of aggressive price competition among several large competitors (joint mo nopoly pricing). "The question is," (as Alice said) "whether you can make words mean so many things." The Monopolist's Alleged Excessive "freedoml/ The trouble with the monopolist, the orthodox economists say, is that he has too much freedom; he sits too comfortably. As a sole seller, he has no competition; or as a "dominant" seller, he hasn't enough. So he can charge a "mo nopoly price"; and he has H mo nopoly power."

Thus the Attorney General's National Committee to Study the Antitrust Laws, in 1955, said: Monopoly power . . . implies the monopoly seller's relative freedom from pressure to reduce costs, to develop new products, or otherwise to innovate, and to diffuse the bene fits among customers.... p. 316 This is an extremely myopic view, which no modern "monopo list," no matte1~ how defined, could afford to act on. It is shortsighted in time, in the sense that a varsity racing crew, having pulled ahead of its rivals, still cannot rest on its oars. It is shortsighted in form, because it ignores two ma jor hazards to the single seller, which orthodox economics brashly overlooks. The first of these two hazards is obsolescence. It is the single seller's risk, in a modern economy, that the rug may at any time be pulled out from under his lovely monopoly by some innovator. The second hazard is that, if he doesn't keep "reaching for volume," the "monopolist's" market may rapid ly outgrow him and his prices, and move into the hands of more imaginative sellers.

Orthodox economics, being all but blind to these factors, vastly overstates the power and impor tance of monopoly, and vastly un derstates the power and impor tance of competition. Innovation, Obsolescence, and the Economists Innovation has become a way of life in the modern American 686 THE FREEMAN November economy. In the less than a quar ter-century since World War II, American industry has poured two-thirds of a trillion dollars into new plant and equipment a large proportion of that for . making new products, which, for leading industrial corporations, now account for from a third to nine-tenths of dollar sales. The research lab and the "Ne,v Prod ucts Division" have become prin cipal engines of competition both defensive and offensive. Interin dustry competition has brought "everybody into everybody else's pasture." The mortality of prod uct markets is estimated in terms of a prospective "product life cy cle" which ends in the graveyard of obsolescence.

Not a glimmer of this is re flected in orthodox economics. It all but ignores this innovation and completely blanks out on the unmentionable subject of obso lescence. Innovation appears only as "product differentiation," which is "monopolistic," as we have seen. Radical innovation, of the sort that makes up Schumpeter's fa mous "perennial gale of creative destruction," is even more "mo nopolistic." Said the Attorney General's Committee in 1955: Extreme product differentiation, by tending to insulate the demand for one product against that for rival products, may allow real posi tions of monopoly to develop. (p. 328) (In plainer English, this means that any new product, like, say, an integrated circuit, so good as to be "in a class by itself," auto matically puts its owner into a class by himself, which means that of a sole producer, which means, a "monopolist.") As for obsolescence, the ortho dox economists not only don't dis cuss it. They don't mention it.

For instance, it is not in the index of Chamberlin's book, nor of the widely-discussed 1959 Antitrust Pol'ic,y of Kaysen and Turner, nor in the index of the most widely sold of all first-year college eco nomics textbooks, that of Paul A. Samuelson. Yet this is not at all strange. Orthodox economics does not pre tend or purport to deal with dy namics. It is a statical theory. It has always been a statical theory. Its idealized competition consists of hosts of small firms making the same products forever and a day. In the treadmill of static econom ics the producers go on, like the figures on a Grecian urn, endlessly turning out the same kind of goods - except, perhaps, for a sly occasional use of "product differ entiation" to beat the boredom of pure price competition.

1968 THE MEANINGS OF "MONOPOLY" 687 (For in this tinker-toy body of theory, no competition is theo retically countenanced except that of price - and even there, the "competitors" take what they can get. There is no marketing - only sales; no R&D; no "raiding" of competitors; no experimental price cutting - in short, no, innovation and no obsolescence.) Thus Professor Alfred Mar shall, the Victorian grandfather of this Victorian way of thinking, wrote: No doubt there are industries . . . which ... are in a transitional state, and it must be conceded that the statical theory of equilibrium of nor mal demand and supply cannot be lJrofitably applied to them. But such cases are not numerous. (italics added) Principles of Economics, 8th Edition, p. 50!. If few industries were "in a transitional state" then, (a notion hard to accept) many are now, and late-Victorian economics, by the confession of its own founder, "cannot be profitably applied to them." In fact how many indus tries today are not "in a transi tional state"?

/I Monopoly Prices" The orthodox economists have an obsessive notion that "monop oly" always means higher prices and scarcity. In fact they use the term "monopoly price" as, in Adam Smith's words, "the high est price which can be got." Thus the following are typical quotations from the orthodox eco nomics department. The monopolist produces less and less and gets a higher price. . . . Benjamin Ward, Elementary Price The ory, MacMillan, 1967; page 93. In general, a monopolist taking over a previously competitive indus try would find that profits could be increased by reducing his output be low, and raising his price above, the level selected by those competing firms .... Antitrust Law & Economics Review: Vol. 1, No.1, 1967; page 137. ... monopolistic interference re duces output needlessly. The fact that it produces such scarcity is re flected in the higher price it creates. Samuelson, Economics: An Introductory Analysis, 5th Edition, 1961, page 428.

A monopolist tends to produce too little because of his fear of "spoiling the market." He connives and con trives to produce scarcity. Samuelson, page 579. These pronouncements have the earmarks of imaginative demonol ogy. Certainly they are not sup ported by the preponderance of evidence on record in the scores of thousands of pages of testi mony given in the major anti monopoly court cases since the Sherman Antitrust Act was passed in 1890. Fact may be stronger than fic688 THE FREEMAN November tion, but in contrast to the above is the following early statement of policy of one of the most fa mous monopolies in American in dustrial history. The selling price for the year has been a gradually lowering one, not on account of competition, but on account of our own voluntary wish to encourage new customers for our very much larger output for alumi num which we intend to produce. The above is an excerpt from the 1895 annual report of a very small corporation which, 50 years later, had become a very large corporation and was still the sole producer of aluminum ingots in the United States.

Such marketing policy is some times called "reaching for vol ume." It has been characteristic of the capitalist system since it superseded the mercantilism of. the eighteenth century. Business firms aim the policy at a larger total profit from a smaller unit profit. The idea has been that lowering prices might result in large volume, which might result in lower per-unit costs, which might result in larger total profits. Often it did. The big money has been made, and the big companies built, on this "mass production-for- the-masses" principle. Fleming, Gasoline Prices and Competi tion, Appleton-Century-Crofts, 1966, p. 34. A famous example was the Model T Ford, the price of which Henry Ford cut, year after year, from an initial $850 to an ultimate low of $290 - making himself a billion dollars in the process. (Ford, incidentally, had a "mo nopoly" by a couple of the econ omists' usages of that word. For one, of course, he was the sole producer of the Model T. For another, he was for years much the "dominant" producer of cars in the lowest price slot in the business.) The self-same reach-for-volume philosophy was restated in 1968 by President Fred Borsch of the General Electric Company. He said: We will continue to trade current earnings for future growth.

You aren't going to get growth in earnings unless you get the growth in volume on which to get the earnings. Business Week, March 30, 1968. The Economists Forget Orthodox static economics is largely based on the assumption of get-rich-quick business policies. Nevertheless the basis of the above business thinking is-not entirely beyond the ken of the orthodox economists. They express it, obscurely, under the rubric of "elasticity of demand." In esoteric charts and jargon, they teach that when a producing firm, by cutting the price of its 1"968 THE MEANINGS OF "MONOPOLY" 689 product, can increase its total dol lar sales, that product has an "elastic demand" ; but if, on the other hand, by cutting the price it will decrease total sales, the product has an "inelastic demand." What they mean by "elastic de mand" is, in somewhat plainer English, a price-sensitive market in which there is more money to be made by offering the product cheap, than by offering it dear.

But for some strange reason, when they get on the subject of "the monopolist," they seem to forget all about their "elasticity of demand." They seem to think that single sellers (sole pro ducers), unlike other business firms, either concentrate on prod ucts with inelastic demand, or, in producing for price-sensitive mar kets, are too stupid to reach for volume. Chamberlin, for instance, talks throughout his book as though elasticity of demand made no dif ference to "the monopolist" - that is, as though the single seller has no reason to reach for volume by selling cheap. In fact he makes the astonishing flat statement that "it is not to [the monopolist's] advantage that the demand be elastic." (page 66) It seems likely that the ortho dox economists have borrowed their obsessional fear of "monop oly prices" from Adam Smith. For in Smith's day the typical pricing of the protected monopolist was for high and quick profits.

"The monopolists," thundered Adam Smith"by keeping the market constantly under-stocked, by never fully sup plying the effectual demand, sell their commodities much above the natural price, and raise their emoluments greatly above their natural rate " Book 1, Chapter 7, P. 61, Modern Li brary. But Smith, in this famous paragraph, said explicitly that he was talking about "a monopoly granted either to an individual or a trading company." And in the language of modern business, such monopolists could "raise a price umbrella" and then rely on the law and its enforcement agencies to ·exclude would-be competitors from rushing in "under the um brella." Is it not obvious that the econ omists' mighty mistake is a pen alty they pay for confusing such protected monopolists with today's unprotected sole producers? The "monopolists" described in the textbooks today are figments of the economists' imagination fantasy firms pursuing policies of high price and contrived scar city well calculated to be such firms' own undoing in short order.

Modern orthodox economists 690 THE FREEMAN November should brush up on their economic history. Such policies were thor oughly tested by businessmen in the years just after the great wave of horizontal mergers around 1900 - and the policies didn't work. Consider the case of the American Can company in its first postmerger year. . . . business was good. The food canning industry was growing. So the new management took steps to capitalize promptly on its 90 per cent control of the can-making busi ness. It raised prices for cans, in gradual steps, by about 25 per cent - and in the middle of the canning season. The results were about what you would imagine. Not only were cus tomers angered, but also, everybody and his brother decided to go into the can-making business - or go back into it. Competitors sprang up like mushrooms. The new Company bought up a few of them, and sev eral million cans, to get them off the market, and then quit trying. With in two years competitors had in creased their share of the can busi ness from less than ten per cent, to 40 per cent.

- William C. Stolk, Chairman of the Board, American Can Company, speech, "Revolution in Containers," before the Newcomen Society, New York, 1960. Whether it is striving to be or to remain a sole producer, no firm can afford such policies. This was stated, with a twist of irony, by Schumpeter in his often-quoted remark that a single seller with out legal protection can achieve his position (and then hold it for decades) "only on the condition that he does not behave like a mo nopolist. 2 What he meant was that one cannot become or remain a "monopolist" by behaving the way the economists say that monopo lists behave. The confusing multiplicity of meanings, and the inaccurate as-' sumptions and connotations, which the economists have given to "mo nopoly," condemn it as a menace to clear thinking. The economists claim it as among their "tools of analysis." But it is shot through with emotional overtones; and so, in practice, has come to be a tool of confusion.

"There is a natural obstacle to progress in abstract thought," once wrote Isabel Paterson, "which has often delayed rational inquiry; an erroneous concept or theory may be expressed in terms which embody the error, so that thinking is blocked until the misleading words are discarded from the givert context,"3 "Monopoly" is one such misleading word. ~ 2 Joseph Schumpeter, Capita,lism, So cialism and Democracy, Harper's, 1947. p.99. 3 The God of the Machine, Caxton Printers, 1964, p. 99.