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per cent.; while on a 10 per cent. interest rate they could earn 11 per cent. on their investment, or a profit of only 1 per cent. on circulation. Hence we could hardly expect the national circulation to be as successful in California as in the East, even if the conditions of issue could have been equalized.

This fact of high prevailing interest rates, added to the firmly rooted prejudice of the California people against paper money, and the opposition of the superior powers of the private banks, and the restrictions of the national law, and the defects of the gold bank law itself,—all these are sufficient and abundant causes for the failure of the national gold bank system to make any important place for itself in California.

The gold banks, along with the gold bank legislation, have almost passed into oblivion. They did not succeed in the East as the bankers of the foreign traders; they did not aid in the march towards the resumption of specie payments; they did not succeed in replacing the gold coin of California with national bank paper; and the adoption of the system was not extensive enough to affect materially the market for United States bonds. Probably their only claim to attention at present is as an example of one of the experiments in banking and currency that were tried or discussed during the time of the greenbacks and suspension.





Reductions in prices made only to increase sales, 626.-Absolute and relative responsiveness of sales, 627.-Factors determining the absolute responsiveness of sales, 628.—Absolute and relative responsiveness as differentiating competitive and monopolistic price-making, 630.—The law of increasing returns and price-making, 631.

- Consumers' leagues and limitation of monopoly prices, 632.—Responsiveness of business, the law of increasing returns, and discrimination, 633.- Detailed statement of the elements to be considered in price-making and mathematical expression of these elements, 634.


any study the simple normally precedes the complex. In approaching, therefore, the problem of price-making (or, if considering railroads, rate-fixing), it is desirable to begin with a single corporation, selling a single product or service at a given price. The managers may believe that this price does not afford the maximum profit. A change in the price is contemplated, and the problem is to determine how great, and in what direction, the change shall be. Let us further assume, to start with, that the contemplated change is a reduction. It then becomes necessary only to determine the limit of that reduction. Afterwards we can determine what principles should control a contemplated addition to a price by considering the addition as a negative subtraction.

Ordinarily, no reduction in the price will be made unless larger sales will result. Obviously, this is not true of monopoly prices alone, tho it has been rightly emphasized in studies of monopoly prices. What is true is that only a monopoly takes considerable account, in fixing its price, of a generally increased or decreased consumption of its output. This is because a generally increased consumption


means, for a monopoly, increased sales. For one of a group of competing corporations the crucial question is not whether there is an increase in the total sales of the article or service which it produces: it is interested, not in total sales, but in its own sales. These will increase much more rapidly if a lowering of price diverts towards it the business of competitors than they will because of any increase of total demand stimulated by such a reduction. Even if such a demand is stimulated, the resulting trade must be held against competitors. This seems to be the fundamental distinction between monopoly and competitive price. In either case an important element entering into the problem of lowering (or raising) a price is the effect a proposed change will have on sales, the rapidity with which sales will respond in number and quantity to a change in price. To the monopolistic corporation the desire is that sales of the given article or service should increase in their total amount, since to it belongs the whole of the resulting increase, and since it has no competitors whose trade it can divert. This total increase or decrease of trade in response to price changes may be termed its absolute responsiveness. To one of a group of competing corporations there may be increase or decrease of business without any change in general consumption. It is merely that the business of this corporation increases or decreases with its price changes, relatively to that of rivals. This responsiveness of sales to the price changes of a non-monopolistic corporation may be differentiated as relative responsiveness. It is equally true, then, of competing and of monopolistic firms that no one of them will lower its price on any part of its product unless the reduction promises to result in larger sales, unless trade is adequately responsive. The difference is that in the one case absolute responsiveness and in the other case relative responsiveness is the determining factor. It is not enough that the amount of product sold should increase when the price is lowered. Increased business

. involves increased expenses. Not only must the sales increase sufficiently to compensate for the lowered price, they must also increase sufficiently to compensate for the greater expenses of which they are themselves the cause. How large a part these expenses will play in price determination depends partly upon their amount relative to the business, partly upon the rapidity with which they increase with increasing business. In general, industry is carried on, up to a certain point, under the law of increasing returns. A certain equipment is necessarily maintained in about the same completeness despite fluctuations of trade. Part of the expenses, therefore, are relatively fixed; that is, they do not increase proportionately to increased sales. It is doubtful if there is any case where expenses bear continuously, through all fluctuations, the same proportion to the amount of sales. There are, however, variations in the extent to which expenses increase relatively to increasing business;' and, as limiting cases are sometimes instructive, it will be well to assume as our first hypothetical examples illustrating the relations of price, responsiveness of sales, and expense to each other,--cases in which the expense bears a definite proportion to the business: 2


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1 Marshall, Principles of Economics, third edition, pp. 422 and 423, Law of Supply Schedule.

2 For similar tables see Ely, Monopolies and Trusts, p. 115; also Seligman, Principles of Economics, p. 257, and Seager, Introduction to the Study of Economics, p. 195.

Here we see that the price of highest return is 12, yielding a profit of 800. Given the same relations of prices to expense and the same relations of contemplated changes in price to each other, the price yielding the highest net return might vary widely in different countries, in the same country at different times, and in industries supplying different kinds of commodities. With the element of changing expense per unit of trade absent, the principal factor in determining the price of largest return for a monopoly is the responsiveness of total demand to variations of price. Certain articles because of their high prices are purchased only by the wealthier classes. A small lowering of the price of such an article might make comparatively little difference in the number of sales, while a further reduction might conceivably make possible its sale to the middle classes in large quantities. A reduction from 15 to 14 might, that is, be attended by far less responsiveness in public demand than a reduction from 10 to 9. Further, the marginal utility of an article or service may diminish not continuously, but irregularly, so that, apart from the influence of social stratification, the same change or the same per cent. change of price from different points may be differently responded to in the resulting volume of sales. Purely psychological elements also enter into the problem. Managers of department stores have long since learned that a reduction from $1 to 98 cents is responded to far more sharply in increased sales than the same or even greater reductions from most other points. Articles used by a single class, as surgeons' instruments, and well within

*Cf. Marshall, Principles of Economics, third edition, pp. 533 and 534, The Monopoly Revenue Schedule; also Cournot, Recherches sur les Principes Mathématiques de la Théorie des Richesses, pp. 61 and 62, or translation by Nathaniel T. Bacon, pp. 56 and 57.

? Cf. Cournot, p. 47; also pp. 54 and 55; or pp. 45, 50, and 51 of translation.

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