The Evolution of Modern Capitalism: A Study of Machine Production

by J. A. Hobson

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.

§ 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.