Monopolist; J.A. Sparks

The fallacy that the exclusive producer of a good or service holds the enviable power to charge Professor Sparks is Acting Chairman, Depart ment of Economics and Business Administra tion, Hillsdale College in Michigan. "anything he wants" has been ex posed and refuted. 1 Yet, most members of the class assumed that in the absence of other "flesh and blood" competitors there would be no curbs upon the pric ing practices of the single seller. Preoccupied with "competition by competitors," the class neglected other important kinds of compe tition. They are not alone. "When competition is named as a regulator of enterprise outputs and prices, it is usually the com petition among the firms already established in this or that indus try which is emphasized . . . Most studies of individual industries refer, when discussing competi tion, almost entirely to rivalry 1 Hans F. Sennholz, "The' Phantom Called Monopoly," Essays on Liberty VII, (Irvington, N. Y.: Foundation for Eco nomic Education, 1960), p. 295.

743 744 THE FREEMAN Deoember the alternatives to by competitors"? keep the lone pro charging "anything among established phasis mine) What are "competition What forces ducer from he wants"? firms."2 (Em-film substitute well for cellophane. Peanuts can replace popcorn. The power of the consumer to substi tute presents a continuous threat to the sole seller of a product who believes that he can charge "anything he wants." Competition by Substitution In order to start class discus sion, I asked one girl if she would buy milk from the hypothetical dairy at $5.00 a gallon. "No!" she said without hesitation. "I'd buy canned juices instead or maybe even powdered milk." The young lady's common sense revealed some doubt that a .single seller can successfully charge "anything he wants." Her answer indicates that sole sellers, no matter how powerful they think themselves to be, confront a very real kind of competition - competition by sub stitution.

In the classroom example the price of whole milk had become exorbitant. No other whole milk competitors were in sight, but re sort could be made to powdered milk or other drinks. What econ omists call the "substitution ef fect" occurs in many areas. As a building material, steel can be supplanted by concrete and cer tain plastics. Glassine and plio2 Joe S, Bain, Barriers to New Compe tition (Cambridge, Mass.: Harvard Uni versity Press, 1956), pp. 1-2. Demand Elasticity Another student interjected, "To me there is no real substitute for milk. I don't like powdered milk and I never drink fruit juices. Substitution isn't open to a per son like me." Consumers, who for various reasons are unable or un willing to substitute, may never theless have a sizable impact on the single seller who arbitrarily attempts to charge "anything he wants." Simple curtailment of product use by such a consumer can seri ously cut into the revenues of the overconfident exclusive producer.

Buyers who have no alternative products available to them are nevertheless often able to cut back on current consumption. When consumer responses to a price rise are substantial and widespread... "elastic" - the single seller's price increase will actually yield him lower revenues than before be cause total consumer outlays for the product will decrease. 3 The 3 Murray N. Rothbard, Man, Economy and State (Princeton, New Jersey: D. Van Nostrand, Inc., 1962), Vol I, p. 110.

1971 "MONOPOLIST" - CAN HE CHARGE "ANYTHING HE WANTS"? 745 single seller charging anything he wants in disregard of this "de mand elasticity" may bring disas ter upon himself· in the market place. It is said that although con sumer demand for many products is "elastic," the demand for "ne cessities" is less changeable, that is "inelastic." The argument goes that since consumer response to price increases for "necessities" is so sluggish and limited, the single producer of such products escapes the discipline of demand elastic ity. However, it has been esti mated in studies of the demand for water that a doubling of prices would within a year reduce domestic household water con sumption by about 30 to 50 per cent. 4 Even a price increase of so necessary a commodity as water would result in quite a decrease in gallons demanded by users within a relatively short time. At best, the sole seller is taking a serious risk when he theorizes that his product is a "necessity"

and therefore immune from the exercise of consumer buying re straint. Potential Competition The young man who had trig4 Armen A. Alchian and William R. Allen, University Economics (Belmont, California: Wadsworth Publishing Com pany, 1969), 2nd edition, p. 58. gered .the whole discussion restat ed his argument: "I suppose it is unlikely, but what if consumers could neither find substitutes for the highly priced good nor could they significantly reduce their consumption of it? Then the sin gle seller would be able to charge anything he wanted, wouldn't he?" "Wait a minute," interrupted another student. "If the dairy owner is able to do so well, that is, successfully charge $5.00 a gal lon for milk, I just might start a dairy, too. People in town could buy milk from me instead of him and for less." Potential competitors wait in the wings, as it were, to make their entrance onto the business stage. Today, companies large and small are in search of profitable products and markets. They have instant capital and "know-how"

available. The threat of such new entrants is an unseen force with real impact on the single seller. Not only do potential competitors come from the outside, they often come from within a company. An employee of the single seller may become convinced that he can "split off" and produce the highly demanded product at a lower price than is currently being asked. The technical computer field has wit nessed this pattern over and over. In all industries, high profits serve as a signal flare attracting com746 THE FREEMAN December petitors to the scene. Entic~ng as 'such profits may be to the single seller, he knows that they must certainly be shared if he contin ues to ask a high price. Conclusion Can the seller who is without actual competitors really "charge anything he wants"? Some may believe, as the class did, that this is so. But, the threat of substitutes, the flexibility of consumer demand, and the eagerness of would-be competitors work to gether to firmly guide the exclu sive producer of a good or service away from arbitrarily high prices toward the realism of the market.

Charging "anything he wants" and receiving it is a seller's dream, but certainly not the real ity with which he must contin ually deal. t) IDEAS ON LIBERTY Danger to Competitors WHAT IS TO HAPPEN to a country in which success in the market place is to be a signal for prosecution by politicians anxious to curry public favor? It is a serious question, prompted by the sit uation which prevails today. Danger of antitrust prosecution threatens any firm that manages to grow and to out-produce its competitors. It would really be a comfort to know that each business was doing its utmost to get as much of the market as it possibly could, that each firm was striving to put out the greatest pos sible production at the lowest possible cost, that, in short, it was being directed in accordance with the public good. But be cause of so many interventionist devices, the measuring sticks provided by a free market are no longer available. You can't be sure that a move or a failure to move on the part of a business is dictated by economic considerations in response to the desires of the people.

SYLVESTER PETRO, "Do Antitrust Laws Preserve Competition~'"