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necessary incident of competition. It is also true that the unit in business may be too large to be efficient, and this is no uncommon incident of monopoly. In every business concern there must be a size-limit of greatest efficiency. What that limit is will differ in different businesses and under varying conditions in the same business. But whatever the business or organization there is a point where it would become too large for efficient and economic management, just as there is a point where it would be too small to be an efficient instrument. The limit of efficient size is exceeded when the disadvantages attendant upon size outweigh the advantages, when the centrifugal force exceeds the centripetal. Man's work often outruns the capacity of the individual man; and, no matter what the organization, the capacity of an individual man usually determines the success or failure of a particular enterprise, not only financially to the owners, but in service to the community. Organization can do much to make concerns more efficient. Organization can do much to make larger units possible and profitable. But the efficiency even of organization has its bounds; and organization can never supply the combined judgment, initiative, enterprise and authority which must come from the chief executive officers. Nature sets a limit to their possible accomplishment. As the Germans say: "Care is taken that the trees do not scrape the skies."

That mere size does not bring success is illustrated by the records of our industrial history during the past ten years. This record, if examined, will show that:

(1) Most of the trusts which did not secure monopolistic positions have failed to show marked success as compared with the independent concerns.

This is true of many existing trusts, for instance, of the Newspaper Trust, the Writing Paper Trust, the Upper Leather Trust, the Sole Leather Trust, the Woolen Trust, the Paper Bag Trust, the International Mercantile Marine; and those which have failed, like the Cordage Trust, the Mucilage Trust, the Flour Trust, should not be forgotten.

(2) Most of those trusts which have shown marked success secured monopolistic positions either by controlling the whole business themselves, or by doing so in combination with others. And their success has been due mainly to their ability to fix prices.

This is true, for instance, of the Standard Oil Trust, the Shoe Machinery Trust, the Tobacco Trust, the Steel Trust, the Pullman Car Company.

(3) Most of the trusts which did not secure for themselves monopoly in the particular branch of trade, but controlled the situation only through price agreements with competitors have been unable to hold their own share of the market as against the independents.

This is true, for instance, of the Sugar Trust, the Steel Trust, the Rubber Trust.

(4) Most of the efficiently managed trusts have found it necessary to limit the size of their own units for production and for distribution.

This is true, for instance, of the Tobacco Trust, the Standard Oil Trust, the Steel Trust.

Lack of efficiency is ordinarily manifested either

(1) in rising cost of product,

(2) in defective quality of goods produced, or

(3) in failure to make positive advances in processes and

methods.

The third of these manifestations is the most serious of all. In this respect monopoly works like poison which infects the system for a long time before it is discovered, and yet a poison so potent that the best of management can devise no antidote.

Take the case of the Steel Trust. It inherited through the Carnegie Company the best organization and the most efficient steel makers in the world. It has had since its organization exceptionally able management. It has almost inexhaustible resources. It produces on so large a scale that practically no experimental expense would be unprofitable if it brought the slightest advance in the art. And yet: "We are today something like five years behind Germany in iron and steel metallurgy, and such innovations as are being introduced by our iron and steel manufacturers are most of them merely following the lead set by foreigners years ago."

The Shoe Machinery Trust, the result of combining directly and indirectly more than a hundred different concerns, acquired substantially a monopoly of all the essential machinery used in bottoming boots and shoes. Its energetic managers were conscious of the constant need of improving and developing inventions and spent large sums in efforts to do so. Nevertheless, in the year 1910 they were confronted with a competitor so formidable that the Company felt itself obliged to buy him off, though in violation of the law and at a cost of about $5,000,000. That competitor, Thomas G. Plant, a shoe manufacturer who had resented the domination of the trust, developed an extensive system of shoe machinery, which

is believed to be superior to the Trust's own system, which represents the continuous development of that Company and its prede'cessors for nearly half a century.

But the efficiency of monopolies, even if established, would not justify their existence unless the community should reap benefit from the efficiency; the experience teaches us that whenever trusts have developed efficiency, their fruits have been absorbed almost wholly by the Trusts themselves. From such efficiency as they have developed the community has gained substantially nothing. For in

stance:

The Standard Oil Trust, an efficiently managed monopoly, increased the prices of its principal products between 1895 and 1898, and 1903 to 1906 by 46 per cent.

The Tobacco Trust is an efficiently managed monopoly. Between 1899 and 1907 the selling price on smoking tobacco rose from 21.1 cents per pound to 30.1 cents; the profit per pound from 2.8 cents per pound to 9.8 cents. The selling price of plug tobacco rose from 24.9 cents per pound to 30.4 cents; the profit per pound from 1.9 cents to 8.7 cents.

The Steel Trust is a corporation of reputed efficiency. The high prices maintained by it in the industry are matters of common knowledge. In less than ten years it accumulated for its shareholders or paid out as dividends on stock representing merely water, over $650,000,000.

C. THE INFLUENCE OF MONOPOLY ON PRICE

207. The Law of Monopoly Price1

BY HENRY ROGERS SEAGER

Monopolists tend to fix those prices for their products which will yield the largest monopoly profits. What this means may be made to appear from a simple illustration.

Consider the case of a patented article in general use, like a special brand of soap. As a rule the expense of producing such an article diminishes as the number of units produced is increased. On the other hand, as the number of units offered for sale increases, the price that can be secured from each unit decreases. Suppose the volume of sales at different prices, the expense of production per unit for these different quantities sold, and the monopoly profits received are as represented in the table on the following page. It is clear that here the price that affords the maximum monopoly "Adapted from The Principles of Economics, 219-221. Copyright by Henry Holt & Co. (1913).

profit will be ten cents. Until this price is reached the larger volume of sales and diminishing expense per unit more than counterbalance the loss due to lowering the price. Below ten cents the loss in price is no longer offset by these factors, although they continue to operate, and consequently profits decline. As the table indicates, monopoly price does not necessarily mean high price. In actual practice the margin of monopoly profit is likely to be quite small except for goods the demand for which is quite elastic.

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When a monopolist enjoys exclusive control of the monopolized good, he may fix the price at the point affording the maximum profit without fear of exciting competition. But few monopolists are so fortunately situated. Competition is an ever-present possibility. Prudence dictates usually a more conservative policy than that which would secure for the time being the largest monopoly profits. In the case above the price is likely to be fixed at something less than ten cents in the expectation that the present loss will be more than made good by the protection of the monopoly from future competition. In the same way fear of governmental regulation often checks the rapacity of monopolists long before such regulation is actually undertaken. The law of monopoly price thus indicates the extreme limit to which monopolists are likely to go in fixing prices and not necessarily the price that they will actually charge under the practical limitations which control their conduct.

In the case of many monopolized products there are different strata of demand, each controlled by somewhat different considerations. This may also be illustrated by reference to the demand for such an article as soap. Many consumers would prefer to pay fifty cents a cake for soap if they believed that by so doing they were getting a better article than their neighbors. Taking advantage of this fact, the shrewd monopolist offers several different grades for sale at different prices. That intended for the mass of consumers is put out under the firm name simply at the price-say ten cents-calculated to afford the maximum monopoly gain. Along with this is offered at a higher price-say twenty-five cents-the same article

colored a little differently or pressed into a different shape, which is designated "superior." A dash of inexpensive scent and a more elaborate wrapper transforms "superior" soap into "superfine" and insures a limited sale at fifty cents a cake. In this way not only a large margin of profit is secured on the supposedly better grades, but consumers are reached who would never think of buying plain, ordinary soap.

This practice is by no means confined to manufacturers of patented toilet articles. It is found in connection with nearly every kind of commodity which enters into personal consumption. Makers of bicycles and automobiles, manufacturers of patented foods and beverages, fashionable tailors and haberdashers, and many others recognize the opportunity for profit along this line, and conduct their business accordingly. The resulting complication in the theory of monopoly price is easily understood. Instead of making calculations relative to consumers' demand as a whole, the monopolist makes special calculations in regard to the extent and the intensity of the demand of each class of consumers.

The law of monopoly price may be summed up in the maxim, "Ask that price which is calculated to yield in the long run the maximum monopoly profit." To decide what that price is the monopolist must gauge the extent and intensity of consumers' demand both as a whole and as manifested by different classes. He must then calculate his own expenses of production for different quantities of the monopolized good. His first concern will usually be to put out the standard grade at a price which will afford the largest monopoly profit. If the demand is elastic this price is more likely to be moderate than high. Having fixed the price for the standard grade, the monopolist will consider whether it would not be profitable to offer superior, superfine, or other grades to particular classes of consumers at higher prices. In connection with each grade he must make a calculation similar to that originally made, and he must also consider how the sales of these superior grades will react upon the sales of the good of standard quality.

208. The Limits of Monopoly Price18

BY JOHN A. HOBSON

The real danger of Trusts in their control of prices appears when we consider the control in relation to the various classes of commodities which form the subjects of monopoly.

18 Adapted from The Evolution of Modern Capitalism, new and revised edition, 230–233. Published by Charles Scribner's Sons (1906).

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