Principles of Economics
Carl Menger
Chapter 5. The Theory of Price
Price is not a fundamental feature of exchange, but only a "symptom". The fundamental feature of exchange is the increase in satisfactions (utility) realized. Rejection of the objectivist theories of value (e.g., Classical labor theory of value).
The issue is that exchange is not an exchange of equivalent values as claimed by the adherents of the labor theory of value (e.g., the product of 1 hour of labor exchanges for another product of 1 hour of labor).
Menger does not provide a model of how prices are formed (a theory of production is absent - individuals are assumed to be endowed with a given quantity of goods and no explanation is provided on how that endowment was achieved), but derives a set of propositions from analysis of a set of market conditions.
The approach in this chapter is to evaluate a series of market conditions characterized by the number of sellers and buyers, beginning with bilateral monopolists. The mechanism with with price (or quantities exchanged in barter) is established is identical in each market (monopolistic or competitive). The only thing that changes is the optimal strategy of the seller.
(5.1) However much prices, or in other words, the quantities of goods actually exchanged, may impress themselves on our senses, and on this account form the usual object of scientific investigation, they are by no means the most fundamental feature of the economic phenomenon of exchange. This central feature lies rather in the better provision two persons can make for the satisfaction of their needs by means of trade. Economizing individuals strive to better their economic positions as much as possible. To this end they engage in economic activity in general. And to this end also, whenever it can be attained by means of trade, they exchange goods. Prices are only incidental manifestations of these activities, symptoms of an economic equilibrium between the economies of individuals.
(5.2) [S]ince prices are the only phenomena of the process that are directly perceptible, since their magnitudes can be measured exactly, and since daily living brings them unceasingly before our eyes, it was easy to commit the error of regarding the magnitude of price as the essential feature of an exchange, and as a result of this mistake, to commit the further error of regarding the quantities of goods in an exchange as equivalents. The result was incalculable damage to our science since writers in the field of price theory lost themselves in attempts to solve the problem of discovering the causes of an alleged equality between two quantities of goods. Some found the cause in equal quantities of labor expended on the goods. Others found it in equal costs of production. And a dispute even arose as to whether the goods are given for each other because they are equivalents, or whether they are equivalents because they are exchanged. But such an equality of the values of two quantities of goods (an equality in the objective sense) nowhere has any real existence.
(5.6) A correct theory of price must instead be directed to showing how economizing men, in their endeavor to satisfy their needs as fully as possible, are led to give goods (that is, definite quantities of goods) for other goods.
In the simplest (primitive) economy have two-party exchange (bilateral monopoly). Price is indeterminate. Price falls within a range determined by differences marginal utilities of the two traders. The expected market price is simply the mean of the range (a result similar to that of an Edgeworth box). Price may deviate from this because of personal characteristics, but this is outside economic theory.
(5.i.1) In the previous chapter, we saw that the possibility of an economic exchange of goods is dependent on an economizing individual having command of goods that have a smaller value to him than other goods at the command of another economizing individual who values the two goods in reverse fashion. The mere statement of this condition, however, strongly implies the existence of limits within which price formation must, in any given instance, take place.
Upper price limit (from A's perspective) set by A's relative values.
(5.i.2) By way of illustration, we will suppose that 100 units of A's grain have the same value to him as 40 units of wine...He will be willing to exchange his grain for wine only if he has to give less than 100 units of grain for 40 units of wine.
Lower price limit (from A's perspective) set by B's relative values.
(5.i.3) [I]f A does find a second economizing individual, B, to whom only 80 units of grain, for example, have a value equal to 40 units of wine, the prerequisites for an economic exchange between A and B are certainly present...and at the same time a second limit is set to price formation. If it follows from the economic situation of A that the price of 40 units of wine must be below 100 units of grain (since he would otherwise derive no economic gain from the transaction), it follows from the economic situation of B that a greater quantity than 80 units of grain must be offered for his 40 units of wine.
Bargaining determines the final price.
(5.i.4) It is easily seen that A could provide better for the satisfaction of his needs even if he should have to give 99 units of grain for the 40 units of wine, and that B would be acting economically on the other side if he were to accept as little as 81 units of grain in exchange for his 40 units of wine. But since there is an opportunity for both economizing individuals to exploit a much larger economic advantage, each of them will direct his efforts to turning as large a share as possible of the economic gain to himself. The result is the phenomenon which, in ordinary life, we call bargaining.
Theory operates behind a veil of ignorance as to who will get the better deal. The expected value is simply the mean of the possible outcomes.
(5.i.6) [T]he outcome of the exchange will prove sometimes more favorable to one and sometimes more favorable to the other of the two bargainers, depending upon their various individualities and upon their greater or smaller knowledge of business life and, in each case, of the situation of the other bargainer. In the formulation of general principles, however, there is no reason for assuming that one or the other of the two bargainers will have an overwhelming economic talent, or that other circumstances will operate more in the favor of one than the other. Under the assumption of economically equally capable individuals and equality of other circumstances, therefore, I venture to state, as a general rule, that the efforts of the two bargainers to obtain the maximum possible gain will be mutually paralyzing, and that the price will therefore be equally far from the two extremes between which it can be established.
(5.i.7) In our case, the price for a quantity of wine Of 40 units upon which the two bargainers will finally agree will lie within the limits of 80 and 100 units of grain...As concerns its position between these limits, if the two bargainers are otherwise equally situated, it will be equal to 90 units of grain.
(5.ii.a.2) If, for example, an economizing individual, A, has a horse that has a value to him no higher than 10 bushels of grain if he were to acquire them, while to B, who has had a rich harvest of grain, 80 bushels have a value equal to a horse if lie were to acquire one...the price of the horse can be formed between the wide limits of 10 and 80 bushels of grain and can approach either of the two extremes without causing the economic character of the exchange to disappear.
(5.ii.a.3) But suppose that B1 does have a competitor, B2, who either does not have as great an abundance of grain as B1 or requires a horse less urgently. Still, B2 values a horse as highly as 30 bushels of grain, and could thus provide better for the satisfaction of his needs if he were to give 29 bushels of grain for A's horse. It is clear that the foundations for an economic exchange of a horse for some quantity of grain exist between B2 and A as well as between B1 and A. But since only one of the two competitors for A's horse can actually acquire it, two questions arise: (a) With which of the two competitors will the monopolist A conclude the exchange transaction? and (b) What will be the limits within which price formation will take place?
(5.ii.a.4) B1 would obviously be acting uneconomically if, in the competition for A's horse, he were to permit B2 to acquire it for the price of 29 bushels of grain, since the economic gain of B1 would still be considerable if he were to give 30 bushels of grain or more for the horse and thereby economically exclude B2 from the exchange transaction.
(5.ii.a.6) Since A would certainly be acting uneconomically if he did not transfer his monopolized good to the competitor who is in a position to offer him the highest price for it, nothing is more certain than that the exchange transaction will, in this particular economic situation, take place between A and B1.
The price may still be indeterminate (it will fall within some range) if there are two potential buyers. The price would be determinate (at the lowest price possible) only if there were an auction held between the buyers.
(5.ii.a.7) As concerns the second question (the limits within which price formation will take place), it is certain that the price that B1 will give A cannot reach 80 bushels of grain since at this price the transaction would lose its economic character for B1. Nor can the price fall below 30 bushels of grain. For price formation would then fall within the limits where the exchange transaction would still be advantageous for B2, who would therefore have an economic interest in competing until the price should again reach the limit of 30 bushels. In our case therefore, the price must, of necessity, be formed between the limits of 30 and 80 bushels of grain. The opinion could arise that instead of the price in the case we have been discussing being formed between 30 and 80 bushels of grain it will be established at exactly 30 units. This conclusion would be correct if we were dealing with an auction sale in which no minimum price had been set in advance or if it had been set below 30 bushels of grain...But if economizing individual A does not bind himself from the beginning with an auction contract and can pursue his interest with complete freedom, there is no economic reason why the price of a horse should not reach 79 bushels of grain in an exchange between A and B, just as there is no reason why it should not be set at 30 bushels.
(5.ii.a.9) Suppose now that the two previous competitors for A's horse, B1 and B2, are joined by a third competitor, B3. If the value of the horse to this third individual would be equal to 50 bushels of grain, it is clear from what has just been said that the transaction again will take place between A and B1, but the price will be formed between the limits Of 50 and 80 bushels. If a fourth competitor, B4, appears, to whom A's horse would have a value equal to 70 bushels of grain, the transaction will still take place between A and B1, but the price will be formed between the limits of 70 and 80 bushels.
(5.ii.a.10) Only when a competitor, for instance the economizing individual B5, appears on the scene, to whom the monopolized good has a value of as much as 90 bushels of grain, will the transaction take place between A and this last competitor and the price of the horse be fixed between 80 and 90 bushels of grain.
(5.ii.a.11) What has been said is valid for every other case in which the foundations for exchange operations exist between a monopolist exchanging an indivisible good for some other good offered by several other economizing individuals. Summarizing, we obtain the following principles: (1) When several economizing individuals, for each of whom the foundations for an economic exchange are present, compete for a single indivisible monopolized good, the competitor who will obtain the good will be the one for whom it is the equivalent of the largest quantity of the good offered for it in exchange. (2) Price formation takes place between limits that are set by the equivalents of the monopolized good in question for the two competitors who are most eager, or who are in the strongest competitive position, to perform the exchange. (3) Within these limits, the price is fixed according to the principles of price formation already demonstrated for isolated exchange.
Moreover, there is an inverse relationship between quantity and price.
(5.ii.b.2) The more complex case that I wish to discuss now is one in which the foundations for economic exchange operations exist simultaneously between a monopolist who has command of a quantity of a monopolized good on the one hand and several economizing individuals on the other hand who have quantities of some other good at their disposal.
(5.ii.b.3) Suppose that a newly acquired horse would have a value to farmer B1, who has a large quantity of grain but no horses, equal to 80 bushels of his grain. To farmer B2 a newly acquired horse would have a value equal to 70 bushels of grain, to B., 60, to B4 50, to B5 40, to B6 30, to B7 20, and to B8 only 10 bushels of grain. A second horse would have a value, to each of these farmers of 10 bushels less than the value of the first, a third a value of 10 bushels less than the second, and so on, each additional horse having a value of 10 bushels less than the preceding one (provided in each case that an additional horse is needed at all). The essential features of this economic situation can be presented in a table.
Number of Bushels of Grain that are Equal in Value to an Additional Horse Acquired by Trade
| 1st horse | 2nd horse | 3rd horse | 4th horse | 5th horse | 6th horse | 7th horse | 8th horse | |
| To B1 | 80 | 70 | 60 | 50 | 40 | 30 | 20 | 10 |
| To B2 | 70 | 60 | 50 | 40 | 30 | 20 | 10 | |
| To B3 | 60 | 50 | 40 | 30 | 20 | 10 | ||
| To B4 | 50 | 40 | 30 | 20 | 10 | |||
| To B5 | 40 | 30 | 20 | 10 | ||||
| To B6 | 30 | 20 | 10 | |||||
| To B7 | 20 | 10 | ||||||
| To B8 | 10 |
(5.ii.b.5) But suppose that the monopolist brings not merely one but three horses to market...[W]hich one (or which ones) of the eight farmers will acquire the horses brought to market by the monopolist and what price will be charged?
(5.ii.b.6) B1 would be acting economically if he were to acquire one horse at a price between 70 and 80 bushels, thereby economically excluding all his competitors from the exchange. But he would act uneconomically with respect to the second horse if he were to offer 70 bushels or more for it, since by such an exchange the satisfaction of his needs would not be better provided for than before. With the third horse, at a price that would exclude B2 from the transaction and which must therefore be at least equal to 70 bushels of grain, the economic disadvantage to B1, and hence the non-economic character of such an exchange, would become still more obvious.
(5.ii.b.8) Since we are assuming that B1 is an individual behaving economically, he will not exclude his competitors from the exchange purposelessly or to his own detriment. He will exclude them from acquiring quantities of the monopolized good only if, and to the extent to which, he can thereby obtain for himself an economic advantage he would have to forgo if he were to permit the other competitors to purchase quantities of the monopolized good. In our case, therefore, where an exclusion of all competitors for the monopolized good is rendered economically impossible for B1 by the economic situation, he will find himself in the position of being obliged to let B2 participate in the purchase of quantities of the monopolized good. He will even have a common interest with B2 in establishing the price of a unit of the monopolized good, in this case the price of a horse, at as low a level as possible under the existing circumstances. Far from driving the price of a horse to 70 bushels of grain or more, B1 as well as B2 will therefore have an interest in seeing that the price is fixed as much below 70 bushels of grain as is possible in the given economic situation.
(5.ii.b.9) In these efforts, B1 and B2 will be limited by the competition of the other competitors, above all by that of B3. They will have to agree to a price at which the other competitors for the monopolized good (including B3) will be economically excluded from the transaction. Thus, in the case of three horses, the price will be formed between 60 and 70 bushels of grain. At a price fixed between these limits, B1 could acquire two horses and B2 could acquire one, in each case economically, while all other competitors would, at the same time, be excluded from acquiring quantities of the monopolized good.
(5.ii.b.10) Price formation between these limits is the only possible result. If the price were less than 60 bushels, B3 would not be excluded from the transaction, and would therefore attempt to obtain for himself the gain that would result from the exploitation of the opportunity confronting him. But since B1 and B2 are economizing individuals, and since they are in a position to gain a considerable economic advantage at an even higher price, they will not allow this to happen. If the price were, on the other hand, to reach or to exceed the limit of 70 bushels of grain, B1 would be able to purchase only one horse and B2 none at all, and only one of the horses offered for sale would therefore actually be sold. In the case of three horses, therefore, price formation outside the limits of 60 and 70 bushels of grain is economically impossible.
(5.ii.b.11) If A were to bring 6 horses to market, we could show by similar reasoning that B1 would acquire 3 horses, that B2 would acquire 2 horses, that B3 would acquire one horse, and that the price of a horse would be formed between 50 and 60 bushels of grain.
(5.ii.b.14) Summarizing what has been said, we obtain the following principles: (1) The quantity of a monopolized good offered for sale by a monopolist is acquired by those competitors for it to whom the largest quantities of the good offered in exchange for it are the equivalents of the units of the monopolized good. The monopolized good is distributed in such a way that the quantity of the good given in exchange that is the equivalent of one unit of the monopolized good is equal for each of the purchasers of portions of the monopolized good (50 bushels of grain equal to one horse, for example).
(5.ii.b.15) (2) Price formation takes place between limits that are set by the equivalent of one unit of the monopolized good to the individual least eager and least able to compete who still participates in the exchange and the equivalent of one unit of the monopolized good to the individual most eager and best able to compete of the competitors who are economically excluded from the exchange.
(5.ii.b.16) (3) The larger the quantity of the monopolized good offered for sale by the monopolist, the fewer will be the competitors for it who will be economically excluded from acquiring portions of it, and the more completely will those economizing individuals be provided with it who would have been in a position to acquire portions even if smaller quantities of it had been offered for sale.
(5.ii.b.17) (4) The larger the quantity of a monopolized good offered for sale by the monopolist, the lower in terms of purchasing power and eagerness to trade will he have to descend among the classes of competitors for the monopolized good in order to sell the whole quantity, and hence the lower also will be the price of one unit of the monopolized good.
(5.ii.c.1) As a rule, a monopolist does not bring given quantities of a monopolized good to market with the intention of selling the whole amount under all circumstances, and of awaiting the result of competition in the determination of the price, as at an auction. His usual procedure is rather to bring a quantity of his monopolized good to market or keep it ready for sale, and to ask a fixed per unit price for it.
(5.ii.c.6) The higher the price, the more numerous will be the individuals, or classes of individuals, who are excluded completely from consuming the monopolized good, the scantier will be the provisioning of the other classes of the population who are not completely excluded, and the smaller will be the quantities of the monopolized good that the monopolist can sell. With reductions in price, on the other hand, progressively fewer economizing individuals, or classes of individuals, will be excluded completely from acquiring any quantities of the monopolized good, the provisioning of individuals who were already participating in the trade at higher prices will be more complete, and the sales of the monopolist will progressively increase.
(5.ii.d.1) In the two previous sections, I have explained the influence of a larger or smaller quantity of a monopolized good offered for sale on the determination of its price, and the influence of a higher or lower price set by the monopolist on the quantity of a monopolized good that will be sold.
(5.ii.d.2) As we have seen, if the monopolist wishes to sell a particular quantity of the monopolized good, he cannot fix the price at will. And if he fixes the price, he cannot, at the same time, determine the quantity that will be sold at the price he has set...But what does give him an exceptional position in economic life is the fact that he has, in any given instance, a choice between determining the quantity of a monopolized good to be traded or its price. He makes this choice by himself and without regard to other economizing individuals, considering only his economic advantage. It is thus in his power to regulate price by offering smaller or larger quantities of the monopolized good for sale, or to regulate the quantity of the monopolized good traded by raising or lowering the price, always in accordance with his economic interest.
(5.ii.d.3) Under some circumstances, [the monopolist] may even have occasion to abandon part of the quantity of the monopolized good at his disposal to destruction instead of bringing it to market, or, with the same result, to leave unused or to destroy part of the corresponding means of production at his command instead of employing them for the production of the monopolized good. He would adopt this policy if...the resultant price would be so low that he would have a smaller profit than could be obtained by destroying a portion of the quantity of the monopolized good at his command and selling only the remainder, at a higher price, to classes of the population having greater purchasing power.
Menger briefly considers the issue of revenue, though he doesn't hit on the concept of revenue maximization.
(5.ii.d.4) It would be entirely erroneous to assume that the price of a monopolized good always, or even usually, rises or falls in an exactly inverse proportion to the quantities marketed by the monopolist, or that a similar proportionality exists between the price set by the monopolist and the quantity of the monopolized good that can be sold. If, for example, the monopolist brings 2,000 instead of 1,000 units of the monopolized good to market, the price of one unit will not necessarily fall from 6 florins, for example, to 3 florins. On the contrary, depending upon the economic situation, it may in one case fall only to 5 florins, for example, but in another to as little as 2 florins. Under some circumstances, therefore, the total receipts that the monopolist obtains from the sale of a larger quantity of the monopolized good may be exactly the same as the total receipts yielded by the sale of a smaller quantity. Under other circumstances, however, they may be greater or less. If the monopolist in our example, were to sell 1,000 units of the monopolized good, his total receipts would be 6,000 florins. For 2,000 units he would not, however, necessarily receive 6,000 florins also, but perhaps as much as 10,000 or as little as 4,000 florins, according to the circumstances of the case. The reason for this lies ultimately in the fact that there are very great differences in the scales of equivalents for the various individuals with respect to different goods.
There is implicitly a loss in individual and social welfare when there is monopoly power.
(5.ii.d.5) If it is assumed that all monopolists are economizing individuals aware of their advantage, then their policy is directed naturally neither to fixing the lowest possible price, nor to selling the largest possible quantity of a monopolized good. It is directed neither to making the monopolized good available to the largest possible number of economizing individuals, or groups of individuals, nor to providing each individual with the monopolized good to the fullest extent possible. The monopolist has no interest in all this. His economic policy is directed to making a maximum profit from the quantity of the monopolized good available to him.
(5.iii.a.1) Monopoly, interpreted as an actual condition and not as a social restriction on free competition, is therefore, as a rule, the earlier and more primitive phenomenon, and competition the phenomenon coming later in time.
(5.iii.a.2) The manner in which competition develops from monopoly is closely connected with the economic progress of civilization. The increase of population, the increased needs of the various economizing individuals, and their growing wealth, drive the monopolist, in many instances even while increasing production, to exclude progressively larger classes of the population from consuming the monopolized good, and permit him at the same time to drive his prices higher and higher....The monopolist cannot always comply with the growing requirements of society for his commodities (or labor services), and if he could comply, a corresponding increase of his sales is not always in his economic interest. In most cases, therefore, he will be driven to make a choice between his clients, and some of the competitors for his monopolized good will either get nothing or will be supplied with it only reluctantly and inadequately.
(5.iii.a.3) The economic situation just described is usually such that the need for competition itself calls forth competition, provided there are no social or other barriers in the way.
(5.iii.b.1) To facilitate comprehension, I shall utilize the case with which I illustrated my explanation of the principles of monopoly trade as the basis of the present investigation. In the [previous] table, B1, B2, B3, etc., represent individual farmers or groups of farmers. To each farmer a first newly acquired horse is the equivalent of the quantity of grain appearing in the first column, and each additional horse is the equivalent of a quantity of grain 10 bushels less. The question before us is: what will be the influence of larger or smaller quantities of a commodity offered for sale by several competing sellers on the price and on the distribution of the commodity among the competitors for it?
(5.iii.b.2) To begin with, assume that there are two competitors in supply, A1 and A2, and that together they have 3 horses for sale, A1 having two horses and A2 one. From what was said earlier, it is clear that in this case farmer B1 will buy 2 horses and farmer B2 one horse. The price will be between 60 and 70 bushels of grain, a higher price being impossible because of the economic interest of the two farmers B1 and B2, and a lower price because of the competition of B3. If A1 and A2 have six horses for sale, it is no less certain that B1 will purchase three of them, B2 two, and B3 one, and that the price will be between 50 and 60 bushels of grain, etc.
As a footnote Menger observes that high search costs (sellers finding buyers and vice versa) inhibit efficient price formation. I wouldn't view this as a defense of merchants who act as agents for sellers.
From this it is at once evident that the great importance to human economy of markets, fairs, exchanges, and all points of concentration of trade in general, is due to the fact that as trading relationships become more complex the formation of economic prices becomes virtually impossible without these institutions. The speculation that develops on these markets has the effect of impeding uneconomic price formation from whatever causes it may arise, or of mitigating at least its harmful effects on the economy of men.
(5.iii.b.3) If we compare the price and the distribution of goods resulting from the sale of a given quantity of a commodity by several competing sellers with the situation observed under monopoly, we find a complete analogy. Whether a given quantity of a commodity is sold by a monopolist or by several competitors in supply, and independent of the way in which the commodity was originally distributed among the competing sellers, the effect on price formation and on the resultant distribution of the commodity among the competing buyers is exactly the same.
(5.iii.b.4) Although the larger or smaller quantity of a good sold has a very decisive influence on its price and distribution under monopoly as well as competitive trade, the fact that a particular quantity of a commodity is supplied by a monopolist alone or by several competitors in supply has no influence on the phenomena of economic life just mentioned.
Surprisingly, Menger does not use a numerical example to describe this competitive market. A two dimensional table representing several sellers and buyers is impractical. Consequently, some of his observation do not hold strictly.
Note that a small contradiction is present here. Menger claims that, for a given quantity offered for market, a "definite price is established." However, he earlier observed that a price is established between two limits (5.ii.b.15).
(5.iii.c.1) I have just explained that, for each particular quantity of a good offered for sale, a definite price is established, that at any set price there is a definite amount of sales, that in both cases there is also a definite distribution of the goods sold, and that it is irrelevant in these respects whether the quantity involved is marketed by a monopolist or by several competitors in supply.
First, Menger first examines the case where there is a ceiling on total potential supply, and observes that sellers have much less incentive to act unilaterally to influence market price. The conclusion is that a larger quantity comes to market at a lower price, than under a monopoly.
Here Menger takes some liberties. While it is not "economically impossible" (5.iii.c.7) for a duopolist to assert market power, the incentive to do so is certainly less.
(5.iii.c.4) To set the economic phenomena involved clearly before us, let us consider the simple case in which the quantity of a monopolized good available to a monopolist suddenly comes into the hands of two competitors.
(5.iii.c.5) A monopolist has died, and has left his holdings of the monopolized good and means of production to two heirs in equal shares. This is an instance of the simple case just posited...[I]f we suppose each of the two heirs to be determined to pursue the sale of the previously monopolized good independently, we have a case of real competition before us, and the questions to be considered are: what quantities of the previously monopolized good will now, in contrast to the previous situation, be offered for sale, and what supply prices will be set by the two competitors?
(5.iii.c.6) In the previous section, we saw that it is frequently in the economic interest of the monopolist to abstain from marketing portions of the whole quantity of the monopolized good available to him, and to destroy them or let them spoil, since he can often obtain a larger profit from a smaller quantity of his goods than he would if he were to sell the entire available quantity at lower prices. Assume that a monopolist has 1,000 pounds of a monopolized commodity and that he can...either sell 800 pounds at 9 ounces of silver per pound or dispose of the whole available quantity at 6 ounces of silver per pound. It is thus in his power to take 6,000 ounces of silver for the entire quantity of the monopolized commodity at his command, or to take 7,200 ounces of silver for 800 pounds of it...He will destroy 200 pounds of his monopolized commodity, permit them to spoil, or otherwise withdraw them from trade, and will offer only the remaining 800 pounds for sale-or, which amounts to the same thing, he will set his price at such a level that the same result will obtain.
(5.iii.c.7) But if the 1,000 pounds of the previously monopolized commodity are divided between two competitors, this policy immediately becomes economically impossible for each of them. If one of the two were to destroy part of the quantity available to him, or if he were to withdraw it from trade in some other way, he would of course elicit a definite increase in the price of a unit of his commodity. But never, or only in very rare instances, would he able to obtain a greater profit by so doing. If A1, for instance, the first of the two competitors, were to destroy 200 of the 500 pounds of the previously monopolized commodity at his command or otherwise withdraw them from trade, he would doubtless cause the price of the good to rise from 6 to 9 ounces of silver per pound, for example. But he would not cause a greater total profit to accrue to himself. The consequence of his action would be that A2 would obtain 4,500 instead of 3,000 ounces of silver, while he himself would obtain only 2,700 ounces of silver (instead of 3,000) in exchange for the other 300 units sold. The intended gain would accrue solely to his competitor, and he himself would suffer a substantial loss.
(5.iii.c.8) The first effect, therefore, of the appearance of competition in supply is that none of the competitors selling a commodity can derive an economic advantage from destroying or withdrawing from exchange a part of the available quantity of the commodity-or, which amounts to the same thing, from leaving the means of production available for its production unused.
Finally, Menger takes an even more drastic shortcut in considering the situation where quantity of potential supply is not restricted. Our duopolists may be able to supply some quantity above 1,000 pounds. The problem, of course, is there is no theory of production here.
The earlier conclusion was that the quantity of some given amount of supply that is offered for sale will increase with competition. The (again unsupported but insightful) conclusion here is that the available quantity will also be larger with competition. The justification for this proposition appears to be that even the smallest potential profit will be pursued (economic profits = 0 under competition) and output will expand in order to capture those profits.
(5.iii.c.11) But competition has still another, much more important, consequence for the economic life of men. I refer to the increase of the quantities of a previously monopolized commodity that become available to economizing men. Monopoly usually causes only part of the quantity of the goods at the command of the monopolist to be offered for sale, or only a part of the available means of production to be put to use. True competition always puts this malpractice to an end immediately. But competition usually has the further effect of increasing the available quantity of a previously monopolized commodity. It is a very rare occurrence, at any rate, for the means of production collectively at the command of two or more competing sellers to be as narrowly limited as those at the command of a monopolist. In the great majority of cases, therefore, several competitors will market a greater quantity of a commodity than a monopolist. Thus the existence of true competition not only causes the entire quantity of a commodity actually available to be offered for sale, but also has the further and much more important result of increasing significantly the quantity that becomes available. When there is no natural limitation to the means of production, this means that more and more classes of society are able to consume the commodity at falling prices, and that the provisioning of society in general becomes ever more complete.
(5.iii.c.13) [C]ompetition, which concerns itself with the exploitation of even the smallest economic gain wherever possible, tends to descend with its goods to the lowest social classes that the economic situation at any time permits. The monopolist has the power to regulate, within certain limits, either the price or the quantity of a monopolized good coming upon the market. He readily renounces the small profit that can be made on goods destined to be consumed by the poorest social classes in order to be able to exploit the classes of greater purchasing power more effectively. But under competition, where no single competitor has the power to regulate by himself either the price or the quantity of a good traded, each individual competitor desires even the smallest profit, and the exploitation of existing possibilities of making such profits is no longer neglected. Competition leads therefore to large-scale production with its tendency to make many small profits and with its high degree of economy, since the smaller the profit on each unit the more dangerous becomes every uneconomic waste, and the brisker the competition the less possible becomes an unthinking continuation of business according to old-established methods.
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