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The twelve plates
The model on which economics is built begins with a market of equals, where no buyer and no seller is large enough to move the price by his own act, and the price comes to each as a fact of nature. This volume is about everything that happens when that condition fails — when one side, or a few, can set the terms the others must take. Market power, on the selling side and the buying side; its sources, its costs, and the long, swinging struggle of the law to check a thing the market is forever re-creating.
what is a price worth, when one side holds the power and the other has nowhere else to go?
The science begins, as a science must, with a simplification, and the central simplification is a market of equals. Picture a thousand farmers bringing wheat to one great market and a thousand merchants come to buy it: no single farmer grows enough to matter, no single merchant buys enough to be noticed, and the price that emerges from their jostling is fixed by none of them and binding upon all. To each it arrives as a fact of nature — the going rate, take it or leave it — and the most that any one of them can decide is whether to trade at that price or to walk away. This is perfect competition, the frictionless plane of economics, and within its bounds the market works the magic for which it is justly admired: the price settles at the cost of producing one more bushel, every exchange that would benefit both parties is made, and no one has the power to arrange matters otherwise. It is a beautiful condition, and a useful one to reason from. It is also, as this volume is concerned to show, very nearly the rarest condition in the whole of economic life — an ideal limit approached now and then and almost never reached, against which the actual world stands out as a landscape of power.
For the moment a single seller, or a single buyer, grows large enough to move the price by his own act, the magic fails and something else takes its place. The competitive farmer faces a flat price: he may sell all the wheat he has at the going rate and not a penny more. But a seller who supplies a large share of the market faces a price that slopes — flood the market and his price falls, hold back and it rises — and such a seller is no longer at the mercy of the price but its author. He surveys the schedule of what buyers will pay at each quantity and chooses the point that enriches him most, which is never the competitive point: he holds back supply, lets the scarcity he has manufactured lift the price, and sells less for more. This is market power, and the definition is exact — power is the ability to face a sloping demand and choose one's place upon it, to set the price rather than take it. On the selling side we call its possessor a monopolist; on the buying side, where the same trick is run in reverse and purchases are withheld to force the price down, a monopsonist. They are one phenomenon seen from two sides.
What power does, beyond enriching the one who holds it, is waste — and this is the part that offends the economist most, so it is worth stating with care, for the charge is not merely that the monopolist grows rich. When he holds back the last units of his product to keep the price high, the trades he thereby prevents were trades that both sides wanted: buyers who would gladly have paid more than those units cost to make, denied them only so that the price on all the rest might stay aloft. That forgone value — the mutually beneficial exchange that simply does not happen — is the deadweight loss, and it is pure waste, enriching no one, the monopolist included, who finds it merely the cost of his fatter margin on what he does sell. Power thus fails twice by the standard the competitive ideal sets: it transfers surplus from the many to the few, which a man may call unjust or not as he pleases, and it destroys surplus outright, which by the discipline's own lights is simply inefficient. The cleverest monopolist recovers some of the waste, but only by deepening the injury — for if he can charge each buyer a different price, the most each will privately bear, he makes the sales he would otherwise forgo and seizes as profit the very surplus a competitive market would have left in the buyers' hands. The competitive price equals the cost of one more and wastes nothing; every departure from it, every exercise of power, either destroys value or quietly confiscates it.
And yet the departures are the rule, not the exception, and it took the discipline an oddly long time to admit it. For a century the textbooks treated perfect competition as the normal case and monopoly as a curiosity at the margin, when the plainest look at the world shows the reverse: almost no real market has the thousand identical sellers of homogeneous wheat the model requires. Most have a few large firms, or many firms each selling something a little different — a brand, a location, a reputation — that lends it a morsel of power over its own small patch of demand. The correction came in 1933, and like the marginal revolution before it, it came twice at once: Edward Chamberlin at Harvard and Joan Robinson at Cambridge published, in the same year and in mutual ignorance, the theory of the vast middle ground between monopoly and competition — monopolistic competition, the world of the differentiated product, where nearly every seller is a little monopolist of the one thing only he sells. After 1933 it was no longer respectable to treat power as the exception. Pure competition and pure monopoly stood revealed as the two rare poles of a spectrum along which actual markets are strung, and most of them lie somewhere in the crowded middle.
Power being general, the questions become where it comes from, why it persists, and what if anything restrains it. It springs from many sources: from the economies of scale that make a single large producer cheaper than many small ones, so that competition would itself be wasteful — the natural monopoly of the water main and the rail; from the law, in the patent that grants a temporary monopoly to spur invention; from the control of a scarce resource; from the brand and the habit it breeds; and, in our own day, from the network whose value to each user swells with every other user, tipping whole markets to a single winner. Against power stands, first, the law — the antitrust statutes, the American Sherman Act of 1890 and Clayton Act of 1914 foremost among them, by which the state claims the right to break combinations and forbid the practices through which power is amassed and abused. But the law has never agreed with itself about what it is for: whether it exists, as the Chicago economists came to insist, solely to keep prices low and serve the consumer, or whether, as an older and lately revived tradition holds, concentrated economic power is a danger to the republic whatever it does to prices. Nor is the law the only check. Galbraith argued that private power is met most effectively not by the competition that seldom materializes but by an answering power deliberately built against it — the labor union against the employer, the great retailer against the manufacturer — a balance of the strong he called countervailing power, with all the perils that phrase implies. And the state is no reliable referee, for power reaches into it: the regulated, as Stigler showed without sentiment, have a way of capturing the regulator and turning the rules written to restrain them into a shelter against their rivals.
Beneath all of this lies the suspicion that gives the volume its place in the table. The competitive model presents the price as the impersonal verdict of supply and demand among equals, a fact of nature owned by no one and imposed by no one — and where competition truly reigns, that is very nearly what a price is. But competition is the special case, and wherever power is present the price is something else entirely: a verdict on a contest that was not equal, recording which side could set the terms and which had no choice but to take them. The wage the single employer offers, the price the single seller posts, the toll the platform exacts at its gate — each looks like a market rate, and each is partly a measure of who held the whip. A price is a verdict on a hidden contest, mistaken for a fact of nature; and here the contest is named outright, for the contest is power. The twelve plates that follow anatomize it — the price-maker and the single seller, the single buyer and the warring few, the differentiated many, the barriers that preserve power and the markups that betray it, the law that fights it and the countervailing power that balances it, the capture by which it corrupts its referee and the platform in which it wears its newest face — and they end by returning to the competitive ideal it all departs from, with the question left honestly open: whether competition is the natural state of markets that power corrupts, or whether power is the gravity of markets, and competition the thing that law and opposed power must forever struggle to impose. The argument remains open.