The theory of monopolies

Book 5, Chapter 14

§1. “It has never been supposed that the monopolist in seeking his own advantage is naturally guided in that course which is most conducive to the wellbeing of society” p 395.

§2. Monopoly revenue (as opposed to “rents,” which Marshall reserves for excess profits from access to scare resources) exceeds production, debt and risk costs.

§3. Marshall uses a figure to show that the monopolist earns the greatest profit at a combination of price and quantity. Since higher prices mean lower quantities (and vice versa), this combination is in a “sweet spot.”

§4. The monopoly’s behavior does not change with lump sum taxes or percentage taxes on profits. A tax (or subsidy) on output quantities or prices will change the profit-maximising quantity.

§5. Although one might assume a monopoly will charge a higher price and provide a lower quantity than a group of competitive firms (modern economics texts do), that assumption would be wrong if competing firms have extra costs from trying to win each other’s customers or lack economies of scale. OTOH, a lazy monopolist may not look for cost savings compared to competing firms, so there’s no easy answer. (Marshall compares a monopoly railway to competing railways — a mix the British are still struggling with!)

§6. The monopolist might lower prices in the short run to encourage more demand (more customers, consuming more) in the long run.

§7. A monopolist who takes consumer surplus into consideration will sell a larger quantity at a lower price.

§8. Producers and individual consumers know their surplus, but the overall situation of consumers is to know, which makes it hard to set policy without better statistics:

Much of the failure and much of the injustice, in which the economic policies of governments have resulted, have been due to the want of statistical measurement. A few people who have been strongly interested on one side have raised their voices loudly, persistently and all together; while little has been heard from the great mass of people whose interests have lain in the opposite direction; for, even if their attention has been fairly called to the matter, few have cared to exert themselves much for a cause in which no one of them has more than a small stake. The few therefore get their way, although if statistical measures of the interests involved were available, it might prove that the aggregate of the interests of the few was only a tenth or a hundredth part of the aggregate of the interests of the silent many (p 407)

In the paragraph that follows, Marshall offers a charming (or naive) hope:

It is perhaps not unreasonable to hope that as time goes on, the statistics of consumption will be so organized as to afford demand schedules sufficiently trustworthy, to show in diagrams that will appeal to the eye, the quantities of consumers’ surplus that will result from different courses of public and private action. By the study of these pictures the mind may be gradually trained to get juster notions of the relative magnitudes of the interests which the community has in various schemes of public and private enterprise (p 408).

Sadly, economists have been unable to generate reliable demand schedules, so most policy discussions depend on special interests, political guesswork, and duelling economists.

§9. Two adjacent monopolies (e.g., for copper and zinc, both needed for brass) might be worse than a merged monopoly for society if their attempts to dominate each other disrupts markets. That said, a merged monopoly will be worse if it can more easily block new competition than separate (weaker) monopolies. Caveat regulator.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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