« ПредыдущаяПродолжить »
the means of that class, would show less responsiveness than articles whose use was, or could be made, more general.
It now becomes possible to apprehend more clearly what is the only fundamental difference between competitive and monopolistic price-making. Both competing and monopolistic companies fix prices to get the largest net returns. With both, responsiveness of business to reductions in price is an important factor tending towards such reduction. The difference is that the monopolistic corporation is concerned only with absolute responsiveness, with the absolute increase of public demand; while any one of a group of competing firms is primarily interested in relative responsiveness, in the increase or decrease of its trade, by taking from or losing to its competitors. And the reason why competition is so effective in keeping down prices is simply that relative responsiveness is a great deal more marked than absolute responsiveness. Whereas a considerable lowering of price may make comparatively little difference in the total sales of an article or a service, a very slight lowering of price by one competing firm as compared with another is almost certain to increase its sales markedly at the expense of that other. The comparison would be as follows:
It is clear that the principles of price-making are the same for both, but that the greater responsiveness of trade for any corporation to a lowering of price, when trade can be diverted from rivals as well as increased absolutely, serves to make the price lower. By the reverse action of this principle a small increase in price, which but slightly diminishes the sales of a monopoly, and may even increase its profits, will ruin a non-monopoly.
So far we have assumed expenses to increase pari passu with increase of sales. The fact is, of course, that expenses almost never do increase in the same proportion as business. Up to a certain point, the point of maximum efficiency, they increase less rapidly, beyond that point more rapidly, than business. Up to a certain point nearly all industries are thus operated under the law of increasing returns. In the case of many of the great industries, such as transportation and the manufacture of finished steel products, this decrease of the relative expense for each additional unit of business is often marked. This principle has been especially insisted on, and some of its consequences traced in studies of railroad transportation. It will be noted that a relatively decreasing expense account acts in the same way as sharp responsiveness of trade in favor of reducing price. In other words,
See, especially, Hadley, Railroad Transportation, chap. iv.
a given amount of either element takes the place, to some extent, of the other. Hence a monopoly carried on under a law of sharply increasing returns (decreasing relative expense), and selling a product the demand for which increases rapidly with decreasing price, is not likely to be very oppressive. The following table illustrates:
In this case the price will be fixed at 9. Contrast with it another case, where relative expenses decrease much less rapidly and sales are less responsive:
Here, because of the difference in the two circumstances referred to, the point of largest return is 11.
Should it ever become possible to organize consumers' leagues made up of persons determined to pay only fair prices, much might be done through the operation of the above-described principles in resisting the demands of monopoly. It would not be necessary that all or nearly all of a monopoly's customers should curtail their con
sumption. The number necessary to force compliance with demands by combining in agreement not to buy would vary inversely with the extent to which the industry was subject to a law of decreasing relative expenses with increased business (which means also increasing relative expenses with decreased business). A considerable group of such persons with properly accredited officers and a system of investigation could, if allowed free scope by the law, maintain most monopoly prices at a point somewhere near the competitive level.
A feature of trade responsiveness is discrimination. The endeavor is made to get the increased business which results from lowering the price without lowering the price to all. The higgling of the market in the Orient is an example. The trader endeavors to exact a high price from those who will pay it, while charging a much lower price to those whose patronage cannot be otherwise secured. The reduction is not made to every one. It is made only when trade is responsive, and is determined largely by the degree of that responsiveness. In this country, in most retail transactions, discrimination of any serious kind among customers is likely to cause the firm which practises it to lose more than it gains. However, it is still practised in some larger fields, particularly in transportation. Where traffic is sharply responsive,i.e., where it is relatively responsive because of competition-we see this discrimination in its extreme form. Special reductions are made in traffic to cities served by several competing roads; while cities situated on the line of any one of these, and not served by the others, receive less satisfactory terms. The reason is that traffic to the city served by several roads is sharply responsive, as regards any one of these roads, to slight variations of rates,sharply responsive because relatively responsive; while the other is more nearly constant, depending less, as to
the traffic the road in question shall receive, on changes of rates.
When there is discrimination in price, it will generally be found that the persons or districts favored do not pay less than cost. Those not favored, however, contribute more largely to profits. When a considerable part of the costs of carrying on business are comparatively fixed, the proportion of these relatively fixed charges assessed on different customers (different sets of sales or parts of business) may vary. Each increment of business must bear its special additional cost; but the fixed charges, like the profits, may be contributed to more largely by some parts of the business than by others. Railroads have, when it seemed necessary, lowered their rates for certain large shippers, or between certain cities, or on certain commodities to such a point as to yield next to nothing above the special additional cost of carrying the traffic in question. The fixed charges, however, remain ?
, to be paid, and are assessed on other less responsive traffic.
Summing up the results of the discussion thus far, we find that decrease in price depends directly on the rapidity with which sales will respond to the decrease by enlargement and on the slowness with which expenses increase with this enlargement of business (or the rapidity with which proportionate expense decreases).
Suppose the problem now to present itself to a corporation of lowering somewhat the price on its output. Let us endeavor to state, mathematically, the conditions to be investigated. In the first place let P be the price from which a change is to be made. Then AP will be the increment of reduction, and P - AP will be the
1 For a further discussion of railroad rate discriminations as caused by conditions of responsiveness see article by the writer in the Yale Review, May, 1907, on “The Basis of Rate-making as Affected by Competition v. Combination of Railroads."
2 Hadley, Railroad Transportation, pp. 116, 117.