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Archive for the ‘Monopoly Price’ Category

Dear unknown reader, I thank you for beginning to read this article. Nevertheless, I suppose your time is scarce. So, if you’re interested by the words « monopoly price » or « Rothbard », I recommend to you to begin with my previous article, which deals with the same topic, but is more interesting, imho.

In Man, Economy, and State, as from the first lines of the third section of the chapter 10 (section entitled “The Illusion of Monopoly Price”), and even more in the part D of this section, Rothbard clearly announces his goal: to attack the very concept of “monopoly price”.

Thus, he writes

“In the market, there is no discernible, identifiable competitive price, and therefore there is no way of distinguishing, even conceptually, any given price as a “monopoly price”

“To define a monopoly price as a price attained by selling a smaller quantity of a product at a higher price is therefore meaningless”.

Further, he expressly explains that his objective is not (only) to show that a « monopoly price » is hard to identify in practice. Indeed, this difficulty had already amply been emphasized by Mises. It’s why Rothbard takes care to note that

“It might be objected at this point that there are many useful, indeed indispensable, theoretical concepts which cannot be practically isolated in their pure form in the real world. Thus, the interest rate, in practice, is not strictly separable from profits, and the various components of the interest rate are not separable in practice, but they can be separated in analysis.”

So, Rothbard’s intention was to demonstrate that it is impossible, even in theory, to separate a “competition price” from a “monopoly price”.

However, in the course of his demonstration, Rothbard seems to hesitate and alternate between a conceptual and a practical approach.

Thus, to the question “Is the market price, 0P, a “competitive price” or a “monopoly price”?”, instead of answering “this question is meaningless”, he writes ““The answer is that there is no way of knowing.»

More notably, he assert that “Contrary to the assumptions of the theory, there is no “competitive price” which is clearly established somewhere, and which we may compare 0P with”, as if he adopted the point of view of a bureaucrat of magistrate in charge of enforcing antitrust policies.

In the same spirit, Rothbard writes,

“The alleged “competitive price” can be identified neither by the producer himself nor by the disinterested observer

“The basic assumption, usually only implicit, is that there is some identifiable stock, say 0A, and some identifiable market price, say, AC, which will result from competitive conditions.”

Yet, with only a small reserve (about the elimination of a present stock of products), I think the Rothbard’ conceptual refutation is correct. Nevertheless, I’m obliged to note that, at least at the time when Rothbard wrote MES, not everything was clear in his mind – I don’t know whether he wrote back about the issue afterwards.

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Man, Economy, and State reader, if he is not cautious enough (as I was, for a time), may easily be led to “over-interpret” the implication of Rothbard’s criticism against the concept of “monopoly price”(*).

Indeed, in the section 3 of the chapter 10, Rothbard demonstrates that this concept is meaningless. But, in no way, this argument proves by itself that cartels are “toothless”, “painless” or “inoffensive” for the “consumers”.

In this section, Rothbard’s approach is strictly conceptual. He establishes that the gains cartel members could obtain cannot be included in a specific “category” of “prices”. But this demonstration, per se, doesn’t show that cartels members couldn’t, through the cartel, earn greater gains that those they could have obtain otherwise. Only a counterfactual approach could do that.

Actually, Rothbard does engage in such a counterfactual approach as well, in the section 2 of the chapter 10. His argumentation is to a very large extent convincing, even if it can’t be denied that « consumers » would gain if, for instance, known diamond stocks were divided in a less concentrated manner. His ethical one (section 1) is also very persuasive. But, here, I only want to evaluate the importance of the conceptual approach, that is, of the argument set out in section 3.

So, what are the consequences of Rothbard’s conceptual criticism on antitrust policy? Obviously, the emptiness of the concept of « monopoly price », if it was acknowledged (a highly hypothetical situation…), could cause some embarrassment to antitrust partisans. Indeed, as a rule, the law deals with concepts and categories, not with degrees. Of course, sometimes, the concepts are hardly distinguished in real life, so judges are bound to deal with degrees as well. Nevertheless, here, the situation is different, because there’s no real substance of which “degrees” could be found.

As a consequence, if you admit Rothbard’s point, you are obliged to acknowledge that antitrust law doesn’t fit with the normal requirements of justice (beside, it was also an implication of section 1 and 2). The problem is antitrust partisans don’t care a lot about that. They know that antitrust is not congruent with property rights and the rule of law. All what they want is to “improve consumer welfare”. What is the weight of property rights and the rule of law against such a goal?

So, for them, the real question is: “does the emptiness of the concept of ‘monopoly price’ as such precludes judges from trying to protect ‘consumer welfare’?” And the answer is: of course, it doesn’t. All what is needed is to see whether producers could employ factors of production in a more “welfare enhancing” way. And this, in turns, “only” requires that judges check whether the “marginal cost pricing rule” is not infringed or, as a proxy, whether autonomous firms don’t try to “collude”.

My own conclusion is that section 3 argument is interesting from a praxeological point of view (actually, it rightly addresses a critical flaw in Mises’s theory, because this latter approached the monopoly gains in a conceptual way while they are only counterfactual), but could hardly have a heavy consequence in antitrust policy. Arguments of the kind of the section 1 and 2 should be more useful.

(*) The argument was the following:

« [W]e cannot use “restriction of production” as the test of monopoly vs. competitive price. A movement from a subcompetitive to a competitive price also involves a “restriction” of production of this good, coupled, of course, with an expansion of production in other lines by the released factors. There is no way whatever to distinguish such a “restriction” and corollary expansion from the alleged “monopoly-price” situation.

[…]

To define a monopoly price as a price attained by selling a smaller quantity of a product at a higher price is therefore meaningless, since the same definition applies to the “competitive price” as compared with a subcompetitive price. There is no way to define “monopoly price” because there is also no way of defining the “competitive price” to which the former must refer.”

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