All Commentary
Tuesday, March 1, 1960

The Phantom Called “Monopoly”

Dr. Sennholz is Head of the Department of Economics, Grove City College, Pennsylvania.

In their denunciation of capital­ism the socialists use some fright­ful phantoms. The oldest and per­haps the most effective one is the notion that monopolistic concen­tration of business inheres per­manently and inseparably in capitalism. They depict in vivid colors the horrors of monopolistic capitalism and then conclude that a free enterprise economy obviously requires governmental restraint lest it deteriorate to a chaotic sys­tem of business monopolies and public oppression.

Recalling the era of “trusts” and “tycoons” around the turn of this century, these socialists valiantly defend the Sherman Antitrust Act of 1890, the Federal Trade Com­mission Act, and the Clayton Anti­trust Act of 1914 which aim at the suppression of business monopoly. And they will be shocked if anyone casts doubt on the wis­dom of the antitrust legislation.

Unfortunately, even free enter­prisers are divided on this point. Some defend our antitrust legisla­tion and the governmental super­vision of big business which it entails, while others summarily reject the prevailing notions on monopoly and the antitrust ac­tivity of the government.

An unbiased investigation of the monopoly problem might well begin with the question: Are mo­nopolies inherently bad? Are they identical with destruction of com­petition, with enormous monopolis­tic gains, and with gouging of workers and consumers? Under what conditions, if any, are mo­nopolies really the evil organiza­tions which they are assumed to be?

In an unhampered market economy a monopoly affords no cause for alarm. A company that has exclusive control of a commodity or service in a particular market is prevented from exploiting the situation by the following com­petitive factors: potential com­petition, competition of substi­tutes, and the elasticity of demand.

Potential Competition

In the United States thousands of different commodities are each produced by a single producer, i.e., by a monopolist, and no one seems to care about it. The 5 and 10 cent stores are full of items produced by monopolists. And yet, all these items are sold at competi­tive prices. Why? Because of po­tential competition. As long as there is potential competition, a monopolist cannot charge monopo­listic prices.

Potential competition exists in all fields of production and com­merce which anyone is free to enter. In other words, wherever government does not prevent free entry through licenses, franchises, and other controls, potential com­petition exists. Most corporations are searching continuously for new lines and items of production. They are eager to invade any field in which business earnings are unusually high.

The invasion of another field by a corporation may involve no more than a simple retooling or reor­ganization that is achieved in a few weeks or months. Or, brand new facilities may be employed for an invasion. Thus one pro­ducer, whether he is a monopolist, duopolist, or a competitor among many, always faces the potential competition of all other producers.

Even if a corporation the size of General Motors were a monopo­list with regard to certain com­modities, it would have to act as if it were a single producer among many. For it continuously faces potential competition from the Fords, Chryslers, General Elec­trics, and others. These potential competitors undoubtedly have the resources, technical know-how, and marketing organizations to compete with General Motors.

But even if competitors of similar size and structure should be absent, the monopolist must be mindful of the potential competi­tion that can arise overnight. Numerous financiers, promoters, and speculators continuously search for opportunities to estab­lish new enterprises. They have formed new giant companies in the past. And they are willing to risk their capital again if they see an opportunity for profits.

Dreading the promoter who may invade his field, the monopolist therefore must act as if he were surrounded by numerous competitors. He must be alert and always “competitive.” He must continu­ously improve his product and re­duce its price. For if he should relax, another company will soon invade his field. The newcomer is likely to be a formidable competi­tor for he has new machinery and equipment. He has new ideas and applies new methods of production. And he enjoys the good will of all customers. Indeed, a monopolist who relaxes invites disaster.

If an enterprise nevertheless en­joys a monopolistic position, it must by necessity be the most effi­cient producer in the field. In other words, in an industry en­dowed with freedom of entrance, a monopoly is an efficiency monop­oly. For the government to im­pose restrictions on it or even dissolve it by force would be to destroy the most efficient producer and invite the less efficient to enter the field. In this case, the economy suffers a net loss in output and efficiency.

In my hometown a small manu­facturer succeeded in gaining a monopolistic position in the pro­duction of creep testers, which are machines that test the behavior of materials at elevated tempera­tures. When I inquired into the reasons for his astonishing posi­tion, he explained with a smile: “I completely routed my two com­petitors, both billion-dollar cor­porations, by continuously im­proving the quality of my product and reducing its price. They finally abandoned the field.” Ob­viously, he would immediately in­vite his formidable competitors to re-enter the field if he failed to improve his product in the future, or charged monopolistic prices.

That government has not in­vestigated or prosecuted this mo­nopolist probably is due to the smallness of his operations. Ex­perience, however, suggests that such large corporations as General Motors, du Pont, or U.S. Steel would face governmental investi­gation and prosecution if they were the monopolist. If this is true—and unfortunately there is no reason to doubt it—govern­mental prosecution aims at big business rather than at monopo­lies.

Competition of Substitutes

But even if American enter­prises failed to compete with each other and potential competition failed to exert a restraining in­fluence on monopolists—which is a most unrealistic assumption—the people would escape monopolis­tic pricing through recourse to substitutes. In many fields the competition of substitutes is more important than that of competing producers.

People’s wants may be satisfied by a variety of products and ma­terials. In the manufacture of clothing, for instance, a dozen dif­ferent materials vie with each other for the consumer’s dollar. The monopolist of any one ma­terial is powerless because monop­olistic pricing would induce con­sumers to switch immediately to other materials. The producers of suspenders compete not only with each other and with potential com­petitors, but also with the pro­ducers of belts. In the transporta­tion industry the railroads com­pete with trucks, cars, airplanes, pipelines, and ships. In the build­ing industry lumber competes with aluminum, steel, bricks, and stones. And Bayer’s aspirin com­petes with Anacin and Bufferin.

In some cases, the adoption of substitutes requires large capital outlays which producers are not willing to make immediately. Com­plete substitution then will take time, although it will ultimately be as effective as immediate sub­stitution. A railroad that wants to substitute oil for coal needs large capital for the purchase of diesel engines. Therefore, it may switch from coal to oil only when it needs to replace worn-out coal locomo­tives. A house owner may switch from coal to oil or natural gas when his old coal furnace must be replaced. Thus, within a period of several years, substitution will have its restraining effect on a monopolist.

Demand Elasticity

The existence of substitutes makes for demand elasticity which, in turn, makes monopolistic pric­ing unprofitable; for higher prod­uct prices would greatly curtail product demand, and thus sales and income, of the monopolist. Therefore, he again must act as if he were a competitor among many.

The same is true in all cases of demand elasticity, whether or not there are substitutes. For instance, electricity for heating must com­pete with such substitutes as oil, gas, and coal. However, as a source of light and of energy for power tools, it probably faces no sub­stitutes. An electricity monopolist, nevertheless, would be greatly re­strained by potential competition and demand elasticity.

If electricity prices would rise considerably, the most important consumers, such as industrial plants and other business organi­zations, would soon produce their own electricity. With the proper equipment anyone can produce his own. Of course, the monopolist may counteract this danger by charging different rates to his dif­ferent classes of customers: low rates to all industrial users who are apt to produce their own electricity, and higher rates to all others. Assuming that residential users do not readily resort to in­dependent power production, are they not liable to fall in the grip of a monopolist? No! Demand elasticity would prevent this. Many people undoubtedly could reduce their consumption of electricity without suffering mentionable dis­comfort. A house owner who may enjoy the light of a hundred bulbs on a winter evening might easily curtail his consumption if elec­tricity charges should increase greatly. But this curtailment of demand would reduce the sales and income of the monopolist.

All producers in fact compete with all other producers for the consumer’s dollars. The manufac­turer of television sets competes with the manufacturer of freezers and refrigerators. If the monopo­list of one commodity—say, tele­vision sets—should raise his price, the consumer may forego the pur­chase of a new set and buy in­stead a new refrigerator. We con­sumers do not allocate our income to the satisfaction of categories of wants but to that of specific wants yielding the greatest net addition to our well-being. This addition, in turn, is determined by the urgency of our wants and by the cost of acquisition. Rising costs obviously affect us adversely, which may induce us to purchase an entirely different product that now contributes most to our well­being.

Consumer resistance to monopo­listic pricing finds expression in yet another form. People who sus­pect monopolistic practice by a producer tend to favor any new­comer who would compete with him. Any enterprise striving to in­vade the field is assured the patronage and good will of all dis­satisfied consumers. In our ex­ample of the electricity monopo­list, the industrial user producing electricity for his own consump­tion may decide to supply power also to his workers and neighbors who, at lower rates, would gladly transfer their patronage. Thus, in a free economy, even the electricity monopolist is greatly limited in his pricing policies.

The same limitations apply in all other industries, including the public utilities. A mail monopoly would face not only the people’s demand elasticity for mailing serv­ices but also the potential com­petition by the numerous inter­company mailing systems. At the present time hundreds of com­panies have intercompany mail delivery systems that could ex­pand their services to include their workers, customers, and other people in their communities if the law allowed. The case is the same with other “public utilities” supplying goods and services such as water, telephone, and telegraph.

On Optimum Growth

In a system of unhampered eco­nomic freedom, a monopolistic market position could be attained only through efficiency. Without government intervention, an effi­cient enterprise tends to grow un­til it reaches its optimum size at which the unit costs of production are lowest. This optimum depends on the nature of the industry, the state of the product and capital markets, the rate of taxation, and the caliber of management. Obvi­ously, a steel company requires a much larger capital outlay and work force than does a dentist’s office or a barber shop. Also, the enterprise managed by a brilliant businessman has a higher point of optimum than one managed by his mediocre successors. A monopo­listic position can be attained only if the optimum size suffices to supply completely a given market.

The territorial expanse of the market which a monopoly is cap­able of supplying depends on two factors: the difference between the unit costs of production of the monopolist and those of his poten­tial competitors, which determines the margin of superiority of the monopolist, and the unit costs of transportation, which are deter­mined by the nature of the product and by the distances involved. A bulky commodity such as cement, for instance, is burdened with high costs of transportation. Conse­quently, the market of the cement monopolist will be relatively small, for an increase in distance from plant to consumer rapidly in­creases his unit costs. On the other hand, commodities with rel­atively low transportation costs such as watches or diamonds can be distributed over vast market areas.

This analysis of the territorial range of markets also reveals that bulky item monopolies are in a relatively favorable position to conduct monopolistic policies. While an American producer of watches must cope with foreign competitors all over the globe, a cement producer may be little con­cerned about the competition of another producer some 100 miles away. He may indeed be tempted to restrict output and raise prices in order to maximize his income. But, of course, such action would invite other producers to invade the territory of the monopolist. Another corporation soon would build a modern plant in that ter­ritory. With a new plant and the good will of all consumers, it un­doubtedly would rout the monopo­list.

It is apparent that a change in transportation costs, production technology, management, or any other cost factor can upset a mo­nopolistic position. Also, a concen­tration beyond the optimum point is an invitation to failure, for the unit costs of production tend to increase again. The monopolist who disregards this fact invites potential competitors to invade his field and reduce him to his opti­mum size. There is no need for government to break up a giant enterprise; if it were too large, the competitors would reduce it.

This is not to deny that even in a capitalist economy a mo­nopoly may temporarily reduce output and charge monopolistic prices. Having reached a monopo­listic position through efficiency, a businessman may attempt hence­forth to follow monopolistic poli­cies. But the foregoing analysis clearly indicates that his attempts are bound to be short-lived. Soon, he will face a crucial struggle with powerful invaders producing with new equipment and enjoying the good will of the public. Of course, it is most unnatural and unlikely for a businessman to rise to emi­nence through product improve­ments and lower prices, and then suddenly to turn toward output curtailment and price increases. But if he should act in such a man­ner, which is conceivable, he prac­tices self-destruction.

It cannot be denied that in our interventionist world many mo­nopolies actually have the power to restrict output and charge monopolistic prices. But the rea­son for this unfortunate state of affairs is to be found in the multiplicity of government re­strictions of competition. If the government prevents competitors from entering the field, the people lose their protection by potential competition. The public utility that enjoys an exclusive franchise is a local monopoly. In this case, the people’s only line of resistance is their demand elasticity and per­haps, also, their recourse to inde­pendent production. Meanwhile, the planners resort to political controls.

Through franchises, licenses, patents, tariffs, and other restric­tions, modern government has in fact created thousands of monopo­lies. Having thus crippled and hampered competition, it then proceeds to control the monopolies. Political bodies now decide vital economic questions in many im­portant industries. They regulate our railroads, airlines, and other means of transportation. They grant exclusive franchises in radio, television, telephone, and telegraph. They monopolize the production and marketing of elec­tricity, water, and gas. They issue patents that assure their re­cipients monopolistic positions.

And, finally, they own and operate the whole postal industry and pre­vent competition through fines and imprisonments. In all these cases, the government effectively restricts competition and thus creates local or national monopo­lies.

Labor legislation has granted monopolistic powers to labor unions, which control whole in­dustries employing hundreds of thousands of workers. They close down vital industries and cripple the entire economy. Through the union shop arrangement, or di­rectly through brute force, they dictate employment conditions in thousands of enterprises. All this is done in perfectly legal sanctity without interference by the gov­ernment. On the contrary, the legal framework for this union power is provided by the very govern­ment that professes to oppose mo­nopolistic practices and positions in the economy.

This frightful union power, in turn, forces enterprises to unite. A small businessman cannot pos­sibly meet the challenge of a powerful industry union. He there­fore is tempted to sell out to a giant corporation with greater power of resistance. Of course, even the giant corporation will be closed by unions. But it cannot be destroyed as easily as can a smaller company.

Effects of Tax Policy

The confiscatory taxation imposed by the interventionist state causes the same industrial con­centration. The middle-aged founder and owner of a million-dollar enterprise is forced to sell out to a large corporation for fear of confiscatory estate taxation. In case of his sudden demise his widow and heirs, who may not be qualified to carry on his business, will face confiscatory inheritance taxes. They would have to liqui­date the business in a very short time to meet the tax liabilities. As the sale of a specialized business requires great skill and good tim­ing, the sale by the widow prob­ably would entail large losses. Therefore, a responsible business­man will arrange the liquidation of his own enterprise in good time. He himself will sell out to his cor­porate competitors and invest the proceeds in marketable securities. Government bonds, for instance, can be readily sold for estate tax purposes. Thus, hundreds of small companies disappear every year.

Especially the most efficient small enterprises tend to be liqui­dated on account of tax considera­tions. A going concern that gener­ates profits is taxed at a rate of 52 per cent after which the corporate owner may be taxed at rates up to 91 per cent. If the owner should decide to liquidate his enterprise during the year, his profits are subject to a capital gains tax amounting to 25 per cent. It is obvious that a businessman is tempted to generate a maximum amount of profits in a given year and then quickly sell or liquidate his enterprise. Thus, hundreds of efficient “collapsible” companies disappear every year.

Governments Create Cartels

Since the rise of political in­tervention in economic affairs, governments have frequently or­ganized or fostered the organiza­tion of cartels. These are combina­tions of enterprises for the purpose of controlling the output or marketing of a commodity or trade through regulation of pro­duction, allocation of markets, price fixing, or other means. This regulation always aims at assur­ing the cartel members a “fair” income, which means a higher in­come than they otherwise would have.

The German government led the way toward cartelization of key in­dustries. From about 1880 to 1930 it organized more than 2,100 car­tels. It was prompted to this dis­astrous policy by yet another intervention: its labor legislation. Since the 1880′s, the German gov­ernment had imposed tremendous “social” costs on its industry through social security legislation and other measures that increased labor costs and reduced labor effi­ciency. Without further govern­ment intervention, this social legislation would have put German producers at a competitive disad­vantage against foreign producers. Under the new burden of social costs, they would have lost not only many foreign markets but probably some domestic markets as well. Then there would have been depression and unemploy­ment until German wages declined sufficiently to offset the social security costs.

Instead of facing depression and unemployment, the German government decided to form car­tels. It imposed high tariffs on foreign goods, which protected the German industries laboring under the heavy burden of labor legisla­tion. Businessmen were thus en­abled to raise prices, which meant that workers were obliged to pay for their social benefits through higher product prices instead of lower wages. In order to prevent unemployment in the export indus­tries, the government encouraged them to sell their products at world market prices. Such sales in­volved losses, due to the burden of social costs, so the cartels adopted profit-sharing schemes by which the producers supplying the do­mestic market at higher prices were forced to subsidize exporters.

Thus, the cartels commenced dumping, which tended to destroy the world market and the world division of labor.

In the United States the forma­tion of trusts proceeded along similar lines. However, the moti­vating force was different. There was no social legislation depres­sing the American economy. Yet, the McKinley administration, by imposing high import restrictions, quite unintentionally achieved the same sort of trustification as was done intentionally by the Bismarck administration in Germany.

The Dingley Tariff of 1897, which became known as “the mother of trusts,” granted tariff protection to basic industries. With industrial imports from Eu­rope greatly reduced, the Ameri­can producers enjoyed monopolistic positions. Consolidations took place on a large scale. During the “Golden Age of Trusts” between 1897 and 1904, 425 trusts were or­ganized with a total capital of more than $20 billion.

This trustification of American industry was promoted by yet an­other factor for which the gov­ernment was solely responsible. This was the rapid credit expan­sion that culminated in the panic of 1907 and the ensuing depres­sion. “Easy money” permitted the organization of new corporations. It made the promotion of corn­binations most profitable, as new securities could be sold at pre­mium prices. Consequently, Wall Street financiers eagerly promoted mergers and reorganizations on a vast scale. When, in 1903, investors began to question the overcapitali­zation of the industrial combines, a trust-share panic developed which signaled the temporary end of trustification.

Two decades later, when the Federal Reserve System was flood­ing the capital market with huge quantities of new credit, gigantic trusts again made their appear­ance. Easy financing permitted the organization of powerful holding companies that controlled produc­tion through several layers of sub­sidiaries. They reigned supreme in all industries that were shel­tered from healthy competition through government franchises, charters, tariffs, and other re­strictions. In the field of public utilities, nine holding company systems—among which the Insull group was outstanding—controlled about three-quarters of the power resources in the United States. Holding companies dominated one-fifth of the railroad mileage. As was to be expected, this period of industrial combination came to an end with the stock market crash in 1929.

A few years later, the Roosevelt administration resorted to extensive industry combinations in or­der to control the American economy. Under the National In­dustrial Recovery Act, the indus­tries were organized along the lines of a cartel with codes that regulated most phases of produc­tion. The objective was shorter work hours, reduced production, higher prices. Under the Agricul­tural Adjustment Act, American agriculture was organized to re­duce production by plowing under crops and thus raise agricultural prices artificially. It is a record of history that all these measures failed dismally. Instead of reviv­ing the economy, they kept it in the grip of deep and lengthy de­pression. But it was the American government that enacted and en­forced these policies which the enemies of capitalism ascribe to private corporations.

Antitrust Legislation

The failure to distinguish be­tween the monopolistic tendencies of government and the propensity of private corporations to grow to optimum size probably underlies the American antitrust movement. Our Founding Fathers were fully aware of this difference. They were so hostile to monopoly power granted by government that Thomas Jefferson wanted to in­clude an antimonopoly provision in the articles of the Constitution.

But their hostility was aimed at monopolistic policies as they were conducted by the colonial powers of Europe before the age of capi­talism. They condemned “mercan­tilism” which was an economic sys­tem similar to modern socialism. As Adam Smith had pointed out, monopoly was “the chief engine of mercantilism.”

It was entirely natural that the nineteenth century disciples of capitalism should continue to op­pose monopolistic endeavors. The common law as it developed in the United States reflected their atti­tude. But during the 1880′s, the prevailing ideology began to change. Under the influence of new schools of thought that were hostile to various aspects of capi­talism, the American public began to view with alarm the growth of industrial enterprise. Advancing technology, especially in the manu­facturing and transportation fields, and the rapid accumulation of cap­ital, made private enterprises grow by leaps and bounds. But such growth in most cases merely moved toward optimum size. Of course, in some cases a very successful entrepreneur may have over expanded his organization, which sooner or later resulted in losses and failure. In other cases, govern­ment franchises, patents, tariffs, and other trade restrictions actu­ally promoted the growth of monopolies. But public opinion, which was molded by numerous “anti­monopoly parties,” by the Populist and Grange movements, laid the blame solely on private enterprise. Thus, while the Founding Fathers had clearly recognized the role of government in every monopoly, their descendants from the 1880′s on saw only the “monopolizing businessman.”

Kansas was the first state to en­act an antitrust law in 1889. It was quickly followed by other states. In 1890, in performance of campaign commitments and in re­sponse to widespread public de­mand, the federal government passed the Sherman Antitrust Act. The act set forth as a national policy the proposition that re­straint of trade and monopolistic market positions of private cor­porations are contrary to the pub­lic interest. Later legislation in­cluded the Clayton Antitrust Act and the Federal Trade Commission Act, the Robinson-Patman Act, certain provisions of the Wilson Tariff Act, the Webb-Pomerene Act, and the miscellaneous provi­sions of other acts.

Responsibility for the enforce­ment of the antitrust laws was placed with the Antitrust Division of the Department of Justice. From a modest beginning, this di­vision has grown today into a large bureaucracy with swarms of lawyers and investigators. During President Harrison’s administra­tion only seven cases were insti­tuted against large corporations. President T. R. Roosevelt initiated 44 cases. Taft began 80, and Wil­son 90. Coolidge’s administration instituted 83 prosecutions, Roose­velt‘s 332, and Truman’s 169. It is significant that the Roosevelt ad­ministration filed its 332 formal charges although its National In­dustrial Recovery Administration had suspended the Sherman Act and was occupied with organizing the American economy along the lines of a cartel. Under President Eisenhower’s administration, the number of prosecutions per year promises to be even higher than under any preceding administra­tion.

These figures suggest that the antitrust prosecution of American corporations shows a marked tend­ency toward acceleration. Two rea­sons may account for this ominous development. First, the growing antitrust bureaucracy feels com­pelled to bring proof for the justi­fication of its existence and growth. An antitrust lawyer knows of no better evidence of his worth than the number of his prosecutions. Consequently, he will file more and more charges against businessmen. Then, these charges, being made in the limelight of nationwide pub­licity, poison the political atmosphere and create further business hostility that demands more charges. In fact, the antitrust charges of the U.S. Justice De­partment have created a badly dis­torted picture of our enterprise economy, which has contributed to the rise of a political ideology that is opposed to capitalism. Today, the Antitrust Division is an effi­cient arm of government omnipo­tence. It has prosecuted virtually every large corporation in the country and continues to embar­rass and harass thousands of busi­nessmen, especially the most emi­nent.

The New Ideology

Of course, the government law­yers and eager politicians offer a different explanation for the ac­celeration of their antitrust ac­tivity. According to them, the ma­ture capitalist economy, such as the American, tends to deteriorate into a monopolistic economy that deprives small enterprises of fair and equal chances; increased monopolization requires increasing antitrust prosecution; the re­straint of trade by big business is the cause, and the government ac­tions are its effect, not vice versa.

No matter how plausible, this is a vicious line of thought taken from the armory of Marxism. Ac­cording to Karl Marx, the pro­claimed father of modern social­ism and communism, the exploita­tion of the workers by the capital­ists leads to industrial concentra­tion and monopolization. A declin­ing number of industrialists grow richer and richer while the masses of the people form an ever-grow­ing army of paupers and unem­ployed. Finally, this process of concentration will come to a head when the people expropriate the expropriators. Thus, socialism is born.

Our statist politicians and anti­trust bureaucrats embrace the first half of this Marxian explanation. They subscribe to the theory that our capitalist system breeds mo­nopolies. But then they part with Marx by proclaiming their desire to save this monopoly-breeding system from its own destruction. They propose to destroy the mo­nopolies through government ac­tion.

We need not here refute this argumentation. Our foregoing dis­cussion of potential competition, competition of substitutes, and the optimum size of capitalist en­terprises contains a cogent refuta­tion. But we wonder about the sincerity of the government inten­tion to preserve our capitalist sys­tem. How can it seriously oppose monopolies if the government it­self continuously is creating them?

A modern offshoot of the Marx­ian concentration theory is the “monopolistic competition theory”, which is propagated at hundreds of our colleges and universities. It was first stated by Edward H. Chamberlain of Harvard Univer­sity and Mrs. Joan Robinson of Cambridge University. Both be­lieve that the old idea of alterna­tive—either monopoly or compe­tition—is fallacious, and that both situations are combined in our economic system. The monopoly of each producer in his own brand is the starting point that gives pro­ducers the power to “administer prices,” gouge consumers, and ex­ploit workers. Pure or perfect com­petition, they believe, can only ex­ist if the number of competing producers is large and if they deal in perfectly standardized products.

The foregoing discussion of po­tential competition clearly denies the requirement of numerous com­petitors. Competition is at work, even if there be only one producer. For, in an industry without gov­ernment franchises or other en­trance restrictions, the monopolist must act as if he were surrounded by hundreds of competitors. If he were to attempt to restrict output in order to raise prices, he would invite immediate invasion by other producers.

The requirement of a perfectly standardized product is based on the assumption that consumers can be pulled into a monopolistic grip by trade names, minor prod­uct variations, by advertisement, and other producer devices. Once you drive a Ford car, you will al­ways be sold on Ford products. This consumer habit will give Ford a monopolistic position which en­tails the power to charge monopo­listic prices.

We reject this assumption of a dull and gullible public. We believe that people continuously shop around, comparing the quality of products with different trade names and labels. Many consumers switch brands and suppliers, al­ways seeking the better product for their money. Consequently, the Ford manufacturers compete not only with General Motors cars, Chrysler cars, American Motors cars, all foreign cars, but also with the manufacturers of houses, freezers, washers, dryers, and so on. For the high price of one prod­uct may induce us to buy an en­tirely different product.

The monopolistic competition theory offers as frail a foundation for government antitrust activity as the Marxian concentration theory itself. Both fail to describe and explain capitalism. But they are succeeding in destroying Amer­ican big business which is the mainstay of our high standard of living. In fact, they are destroying competition and individual enter­prise.

  • Hans F. Sennholz (1922-2007) was Ludwig von Mises' first PhD student in the United States. He taught economics at Grove City College, 1956–1992, having been hired as department chair upon arrival. After he retired, he became president of the Foundation for Economic Education, 1992–1997.