Monopolies and the People

by Charles Whiting Baker

That competition is a force, even in the popular estimation, is evidenced by such common expressions as "the pressure of competition," "a strong competition," and indeed, "the force of competition." But these very expressions show us as well, what we have already found to be true in the preceding chapters, that it is not a constant force but a variable one. What, then, are the laws of its variation?

Let us see what we can learn by a study of three typical examples of the force of competition. Let us take first the business of growing corn. There are perhaps three million farmers in the United States engaged in producing corn, and each one of these competes with all the others. Is this doubted? We have defined competition as a rivalry that tends to make the sellers offer better goods for a less price. Now at first sight it may seem that there is no rivalry at all. Neighboring farmers work together in all harmony; and no man thinks that because his neighbors have raised a large crop of corn, he is in any way injured. And yet this tendency to give better goods and lower prices exists and is plainly felt. Suppose a new and superior variety of corn were introduced, which buyers preferred. Some farmers would at once begin to raise it, so that they might be more sure of a market and perhaps of a better price, and other farmers would be obliged to follow suit to meet the competition. Again, consider that the supply and demand adjust themselves to each other through competition. For suppose, at the ruling price, the demand to be less than the supply; then to increase the demand, the price must fall; and the cause of the fall in price is simply that the farmers compete with each other for the market, and lower their prices in order to secure a sale for their crops. Note, however, that the rivalry in this case never becomes a personal one. Each farmer recognizes that an increased supply lessens the price for his goods; but his neighbor's extra acreage is such a drop in the bucket, that he never thinks of it as being really a rival of his own crop.

Take as a second example, the wholesale paper trade. Here are perhaps three hundred men, each knowing personally many of his competitors and probably hating some of them cordially. Each striving to secure for himself all the trade possible, and to gain, if he can, his rivals' customers. He sends out his salesmen with instructions to, "Sell goods! For the best prices you can get, but sell them, anyhow." These "drummers" are sharp, active business men, they might well be employed in directing some productive process; but they go out and spend their time in inducing customers by all the means in their power to buy their goods. They spend money in various "treats" to secure the good-fellowship of the man with whom it is desired to trade, and use his time as well as their own. Another item of expense is for advertising and for keeping the firm name prominently before the purchasing public. All these things cost money, as any wholesale merchant engaged in a business where there is sharp competition can testify. It may be thought that a firm which would have the courage to do away with all these expenses and give the money thus saved to their patrons in reduced prices and better goods, would be able to keep its trade and even gain over its competitors. But it is hardly so; most men are more likely to be wheedled into taking slightly inferior goods at a slightly greater price.

Another matter to be considered in this connection is the variation in price. In the case of the producers of corn, we saw that prices were practically uniform at any given place, being fixed by the ratio of supply and demand in the chief markets of the world. But in making sales of paper, the sharp, close-dealing buyer is generally able to secure a better price than a buyer not posted in regard to the condition of the paper trade.

As competition becomes more intense, its burdens become more heavy to carry. Perhaps two of the largest houses in the trade, who are able to force prices lowest, come to a sort of tacit understanding that their salesmen "will respect each others rights a little and not force prices down beyond all reason." It is plain that here the foundation is laid for the establishment of a monopoly. Yet the agreement certainly seems to be nothing more than these two firms have a right to make. Its result is seen, however, in a slight increase in the price their customers have to pay. Soon the tacit agreement becomes a formal one. Then other firms are taken in. The first seed has borne fruit. The combination grows larger and stronger. The number of producing units is growing less. Finally it includes practically all the paper manufacturers in the country. Whoever wants paper must buy of the combination, there is no other source of supply. Competition is dead.

If the combination is strong enough and is managed well enough, it may be permanent; and prices of paper will be regulated by other laws than the law of competition. But suppose that the number of paper makers is so great and that they are so widely scattered that the combination proves difficult to maintain; local jealousies creep in, and charges are made of partiality on the part of the managers. The combination finally breaks up. Can we expect a perfect return to the old system of free competition? When men have once reaped the enormous returns that are yielded by the control of a monopoly, the ordinary profits of business seem tame and dull. There will surely be attempts to form the monopoly anew on a stronger and more permanent basis; and even if these attempts do succeed in producing only short-lived monopolies, the effect will be to keep the whole trade and all dependent upon it in a state of disquiet and uncertainty. Prices will swing up and down very suddenly between wide limits; and it is everywhere recognized that stability in price is a most important element in inducing general prosperity. A perusal of the trade journals for the years 1887 and 1888 will convince one of the truth that when a combination is once formed, its members are loth to try competition again. A considerable number of combinations which were formed in 1887 were soon broken up, often from the strength of old feuds and jealousies. But in almost every case they have been formed anew on a stronger basis after a short experience of competition.

This matter of the variation in price is a very important one, and it has an important influence in checking business prosperity. Men are far less apt to engage in an enterprise, if they cannot calculate closely on prices and profits. But the main point, after all, is the waste which is due to competition. It is for the interest of the public at large that the papermakers should devote all the energies which they give to their business to making the best quality of each grade of paper with the least possible waste of labor and material.

Take for a third example two railway lines doing business between the same points. We have fully pointed out the practical working of this sort of competition in the chapter devoted to railways. It is plain that the general effect is a fluctuation of rates between wide limits, an enormous waste of capital and labor, and ultimately, the permanent death of competition by the consolidation of the two lines.

In comparing now the above three cases, the most noticeable difference in the conditions is in the number of competing units. There were in the first example three million competitors; in the second, three hundred; and in the last, but two.

The first difference in the competition which existed is in intensity. In the case of the producers of corn, competition was so mild that its very existence was doubted. In the case of the papermakers it was vastly more intense, so that it caused those engaged in it to take steps to restrict and finally abolish it. In the case of the railroads it was still more intense, so that it was not able to survive any length of time, but had to suffer either a temporary or permanent death very soon. Let us state, therefore, as the first law of competition, this: In any given industry the intensity of competition tends to vary inversely as the number of competing units.