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 Aa, the millionth at Bb, and so on, the aggregate price of the first million tons being ABba, that of the first two millions being ACca.
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 AFfa, yielding an aggregate net profit A'F'fa. They will not produce five millions because the figure AEea bears a smaller proportion to AEE'A' than does AFfa' 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.
§ 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:—