Plate i in print

The Monopolist

the single seller who makes the price instead of taking it: how, facing the whole demand alone, he holds back his wares to lift the price above its cost — the trades thus strangled the deadweight loss of his power, and the same logic, mirrored, the buyer's who is too few.

Set a single seller before the whole demand for a thing, and he will not sell as much as he can but as much as pays him best — holding back his wares to lift their price, and stopping where the last sale's gain would turn to loss.

— the model of this plate, after Antoine Augustin Cournot, 1838

The fourth and last of the failures is the most direct, for it does not corrupt the price or evade it but seizes it. In the families of the prices, every trader took the price as given — a fact of the market, beyond any one trader's reach. The monopolist is the trader who has escaped that condition: alone in his market, he does not take the price but makes it, and makes it to serve himself.

The distinction is the hinge of the whole volume, and it is worth drawing sharply. A seller in a crowded market is a price-taker: there are so many like him that the price is set by the market entire, and he can do nothing to move it — he may sell as much as he pleases at the going price, but a penny above it and every buyer deserts him for a rival, so he takes the price as a fact and asks only how much to produce. The monopolist faces no such discipline. Being the only seller, he confronts the whole demand of the market himself, and that demand slopes downward: the more he wishes to sell, the lower the price he must accept; the less he offers, the higher the price he can command. The price, for him, is not a fact but a choice — fix the quantity and the demand hands you the price, or fix the price and it hands you the quantity. He is a price-maker, and the question he asks is not the price-taker's, of how much to make at a given price, but his own, of what price to set.1

1. The price-taker (competitive firm) faces a horizontal demand at the market price — selling more or less does not move it — and optimizes quantity alone. The monopolist, sole seller, faces the market's entire downward-sloping demand: price and quantity are linked, so choosing one fixes the other. The competitive families assumed price-taking throughout; market power is the condition of price-making. Antoine Cournot (1838) gave the first formal model.

What price he sets follows from a calculation the price-taker never makes. Because the monopolist faces the downward demand, selling one more unit forces him to lower the price not only on that unit but on all the units he was already selling — so the extra revenue from one more sale is less than its price, by the amount he loses on the rest. He pushes sales only to where this extra revenue still covers the extra cost, and there he stops — short of where price equals cost, which is where a crowd of competitors would have been driven. The result is the signature of monopoly: output restricted, price raised. And the harm is of two kinds, which must be told apart. Part of the monopolist's gain is merely transferred from his buyers — they pay more, he receives more, a shift of wealth from purse to purse that leaves the world no poorer in sum. But part is destroyed outright: the trades that would have happened at the competitive price and do not happen at his higher one — buyers who valued the thing above its cost but below his price, and so go without — are mutually beneficial exchanges that simply fail to occur. That lost value, gained by no one, is the deadweight loss, the dead weight of market power: not wealth moved, but wealth annihilated, the price of the price set too high.2

2. Facing downward demand, the monopolist's marginal revenue lies below price (an extra sale cuts the price on all units), so he sets marginal revenue equal to marginal cost and produces where price exceeds marginal cost — restricting output. The welfare effect splits: a transfer (consumer to producer surplus, distributionally neutral) plus a deadweight loss (the surplus from beneficial trades priced out of existence — value destroyed, captured by no one). The deadweight loss is the efficiency cost of market power.
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Everything said of the seller runs in mirror for the buyer, and this mirror is the half of market power the textbooks slight and this volume means to restore. A monopsonist is a sole buyer — the one mill in a town that hires all its labor, the one cannery that buys all the district's catch, the one platform through which all the sellers must reach their market. Where the monopolist faced the downward demand and held back his selling to raise his price, the monopsonist faces the upward supply and holds back his buying to lower the price he pays: to buy one more unit, he must offer a higher price to all his suppliers, so the extra cost of one more purchase exceeds its price, and he stops short of where a crowd of competing buyers would have bid. He buys too little and pays too little, transferring to himself what should have gone to those he buys from, and destroying the trades his low price strangles. The worker underpaid by the only employer, the farmer underpaid by the only buyer, are the victims of monopsony exactly as the gouged customer is the victim of monopoly — and the single buyer of labor met in the volume on the wage was this same power, glimpsed in one market and now seen entire. Too few sellers, or too few buyers: it is one power, wearing two faces.3

3. Monopsony is monopoly's mirror — a sole buyer facing upward-sloping supply restricts purchases to hold down the price paid, since buying more raises the price to all suppliers (the marginal cost of the input exceeds its price). The monopsonist buys too little and pays too little, transferring surplus to himself and creating deadweight loss. Labor monopsony (a sole employer) underpays workers — the case treated by the Wage's flagship. Monopoly and monopsony are one phenomenon, "too few on one side," in mirror.

If a monopolist's price stands above his cost, his profit is a standing invitation to others: enter this market, undercut him a little, and take his customers and his profit for yourself. In a market open to entry, this is exactly what happens — rivals pour in, the price is competed back down toward cost, and the monopoly evaporates. So the deep question is not why a firm would charge a monopoly price (any firm would, if it could) but why the entry that should erode it does not come — what keeps the rivals out. The answer is barriers, the subject of the next plate: the scale that lets one firm undercut any newcomer, the patents and licenses that forbid entry by law, the networks that grow more valuable the more they are used and so cannot be matched by a small rival, the brands and switching costs that bind customers in place. Market power, where it lasts, is always sheltered by some barrier; remove the barrier and the power follows it. This is why the study of market power is, in large part, the study of barriers to entry — and why the cure may be less to punish the monopolist than to tear down the wall that protects him.4

4. A monopoly price (above cost) attracts entry, which competes it away — so durable market power requires barriers to entry that keep rivals out: economies of scale (a large incumbent undercuts entrants), legal barriers (patents, licenses), network effects, brand loyalty, switching costs, control of essential inputs. Where entry is free, power is transient. The persistence of market power is thus largely the question of barriers — the subject of The Moat.

So the monopolist stands before us in his anatomy: the price-maker who, alone on his side of the market, restricts what he sells or buys to bend the price his way, transferring wealth to himself and destroying the trades his bending strangles. What is to be done about him is the matter of the plates to come, and three answers will contend — the entry that erodes him where barriers do not bar it, the antitrust law that breaks him where they do, and the innovation that, in the longer view, overthrows every monopoly with the next. But beneath all three lies the question the trapped buyer asks and the flagship will answer: what is a fair price worth, when one side has nowhere else to go? For the monopolist's power over his buyers, and the monopsonist's over his sellers, comes down in the end to a single fact — that the other side has no alternative, no rival to flee to, no exit — and a fair price, the volume will find, is only ever what the having of an alternative compels.5

5. The volume's three remedies for market power — entry (where barriers permit), antitrust law (The Decree), and innovation, or creative destruction (The Gale) — are developed in the plates that follow. Beneath them lies the volume's question, answered in the flagship (The Exit): what a fair price means when the weaker party lacks alternatives. The thread is that power is the absence of an alternative for the other side, and a fair price is what the availability of one compels.

The monopolist is market power in its plainest and most famous form: the single seller who makes the price he should have taken, and makes it too high, so that some of what he gains is taken from his buyers and some is destroyed for everyone. His mirror, the monopsonist, does the same in reverse, paying too little where he should have paid the market rate. Together they are the failure this last volume of the family treats — not a fault in what the price conveys, but a seizure of the price itself by those too few on one side to be disciplined by competition. The plates that follow anatomize the barriers that shelter such power, the collusion by which the merely few contrive it, and the law that would undo it, before the flagship reaches the bottom of the matter and finds market power to be, at root, the denial of an alternative — and a fair price to be the gift of competition, which is only the standing freedom to walk away. The next plate asks why the monopolist is not simply stormed by rivals: what wall it is that keeps them out.