competitive prices, and it is generally its interest to do so," 15 and that of R. T. Ely, when he writes, "The conclusion which we reach then is that monopoly prices are generally higher than competitive prices. . . The higher the average of well-being, and the more readily they spend money, the higher will be that price which will yield the largest net returns. We have these conditions meeting in the United States. We have a high average of well-being, and a great readiness in the expenditure of money, and consequently we have a high monopoly price." 16 Large combinations of capital have been exceedingly reluctant to pass on to consumers the full benefit of economies and efficiencies of production. Experience has taught monopolies, partial or otherwise, the expediency of exercising monopoly influences over prices within much narrower limits than were attempted during the period of first formation of great business combinations.

Monopoly and Class Price.-Business combinations have developed, moreover, a practical method of adapting price policies to all classes, grades and varieties of consumers. Each grade of consumer is offered a grade of commodity particularly calculated to stimulate demand in that level of consumers. In almost all kinds of commodities, some people want the very best, some want the best, some want a good grade, some want "seconds." Some want fancy style, some want utility, some want certain combinations of the two. The price which each grade of consumer can be persuaded to pay for the most attractive grade of goods is a matter for painstaking calculation. Instead of using the advantage of its great influence in determining a single price, the partial monopoly frequently gives its attention to working out a set of prices to cover the demands of varieties of consumers. Instead of a uniform monopoly price, a scale of monopoly prices takes the field, each catering to a special class of buyers, and figured on the basis of "all the traffic will bear" for that class. Often the so-called superior grade of goods is only something of about the same quality, dressed up in a finer appearing package, and bearing an aristocratic brand. The superfine article must radiate a certain atmosphere of exclusiveness in order to appeal to exclusive people, and must exhibit an élite style in order to arouse buyers of fastidious tastes. With the quality and style of the various grades of goods nicely calculated, prices are attached which should attract enough buyers to absorb the quantity offered by the business combination. Moreover, corporations have sometimes attempted to formulate price policies which would take advantage of the fact that some buyers can afford to pay more for the same article than others can. This principle found its greatest acceptance probably in the rebates of railroads. The railroads, before drastic regulation took effect,

15 Evolution of Modern Capitalism, p. 160.

16 Ely, Monopolies and Trusts, pp. 136-137. See also Taussig, Principles of Economics, Vol. II, pp. 112-113; J. B. Clark and J. M. Clark, Control of Trusts, pp. 12-13; Van Hise, Concentration and Control, p. 84; Haney, Business Organization, p. 137; Macrosty, Trust Movement in British Industry, pp. 335-337; E. Jones, Trust Problem in the United States, Chapter XI.

made it a common practice to charge different shippers different freight rates for the same railroad service.17 The price policy may thus easily become what each individual will bear, or what a group of individuals of a certain grade will bear, instead of what the general traffic will bear. This gradation of prices to suit gradations of buyers is an innovation accompanying large scale business, and is primarily attributable to the discovery by the monopolist or semi-monopolist that only by such a device can he reap the largest net gains.

Monopoly Price and What the Traffic Will Bear.-The monopoly price for each grade of goods, or the monopoly price for all the articles in an ungraded industry, is the outcome of an elaborate mathematical calculation. A large quantity of goods selling at a moderate price may yield more net profit than a small quantity of goods selling at a high price. Monopoly price is not the highest price at which some goods can be sold, but is the price which will sell that quantity of goods yielding the largest net profit. Assume a commodity which costs one dollar to produce. If the selling price is made $1.50, the total sales may be 1,000 articles. The net gain would therefore be $500. But assume the price is put at $1.40, and that at this lower price the volume of sales is 1,500. Obviously the net gain at the lower monopoly price is $600. This illustration will suggest the fact that a multitude of combinations can be figured out, and that some one combination of selling price and volume of sales will yield the maximum net revenue. Generally speaking, large business combinations prefer to lean toward as small a volume of sales as possible at as large a price as possible, in so far as that is not inconsistent with the maximum net gain for the industry. Enormous production at the lowest possible prices is not sought after so much as limited production at prices high enough to yield liberal net profits. This fact has been the basis for the repeated accusation brought by production enginers that "if we could harvest more dollars by producing fewer goods, we produced the fewer goods." 18 To the extent that this policy is in vogue, it brings a private net gain at the expense of a net social loss. It is scientific restriction of production which yields maximum business profits but which furnishes society with too few goods at too high prices. Hence, to charge what the traffic will bear is a policy which is capable of bringing either social good or harm, according as it is applied.

Monopolies and the Steadying of Prices.-A frequent price achievement under large scale business is the steadying of prices. For example, from 1901 to 1916, the United States Steel Corporation maintained the price of steel rails steadily at $28 a ton. Other large corporations make it a policy to raise prices somewhat more slowly than the general market rise during a period of increasing prices, and to lower prices less swiftly

17 Refer to A. Marshall, Industry and Trade, pp. 415-417, for further explanation. See also Ely, Monopolies and Trusts, pp. 108-118.

18 H. L. Gantt, Organizing for Work, p. 24. See also Van Hise, Concentration and Control, p. 85, and Jenks, The Trust Problem, p. 63.

and less sharply in a period of falling prices. Industrial combinations which own and control their own sources of raw materials, such as coal or iron mines, are particularly able to steady their selling prices because they are in a position to regulate their costs of production more evenly. Some semi-monopolistic corporations, however, have an unsteadying effect on prices. For instance, from time to time a newly formed combination seeks to establish itself in the good graces of buyers by starting out with a price below the market level. After a certain amount of good will is built up, the combination stealthily elevates its prices to all that the traffic will bear. In the course of the transition, the other producers and dealers in the field are face to face with anything but a steadying influence. Another class of big combinations have been found to fix their prices so extremely high that the exorbitant profits have invited competitors to enter the field. Then has ensued a price war and cutthroat competition, all of which has caused prices to go down from the former great heights to a point equal to the cost of production, and even for a time below the cost of production. It is safe to state, however, that this condition of violent price fluctuations occurred principally in the early years of experience of business combinations, and that the experience thus dearly bought has persuaded many business leaders to avoid extremes of monopoly price likely to invite new competitors to engage in bitter price wars. On the whole, therefore, the later periods of large scale business have been marked by an endeavor to exert a steadying influence on price levels, and to avert violent fluctuations.

Mechanism for Exertion of Monopoly Influences on Price Policies. -The business mechanism for exerting monopoly price influences varies widely. In some lines of commerce, definite centralization of management occurs, and trusts, corporations, holding companies, mergers, and amalgamations take the place of former separated establishments. The common principle in such business concentration is a definite centralization of management. Plants and companies which formerly were independent and sovereign become branches of a centralized management. Price policies in such companies are formed by the central management, and the constituent companies and plants direct their price policies in compliance with the uniform policies laid down by the central management. There is another great class of price agreements in the nature of understandings entered into between independent companies. Each branch of industry, each line of commerce, each field of production, almost without exception, has a business association of some sort. These associations serve a great many purposes, some of them constructive and some tending toward the fixing of excessive prices and the undue restraint of trade. The history of price agreements shows many forms of understanding or bargaining entered into for the purpose of putting prices up to all that the traffic would bear. The "Gary dinners" which maintained a tacit understanding among steel producers as to what prices would be charged; "any number of dinner and luncheon clubs and

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reunions and general understandings, winks, and telephone messages, mutual understandings between anthracite coal operators or big meat packers as to the distribution of business and price quotations, joint action among dealers in building supplies to charge contractors exorbitant prices for cement or brick, common price terms among wholesale grocers or among druggists,-in these and other ways, price agreements have been maintained at different times and in different degrees in most lines of economic activity. Agreements in the form of pools were at one time widespread. Pools involved definite agreements either to divide the product into quotas for each producer who belonged to the pool, or to divide the quantity each producer was to sell or the territory in which he was to sell, or to put all profits of all companies into a common fund to be shared ultimately by the several companies on an agreed pro rata plan, or any combination of these policies. These agreements of one sort and another have run a harsh gauntlet of laws and court decisions, and have been generally condemned in so far as they result in undue restraint of trade, or unfair and unreasonable prices.

Trade associations have, however, found it possible to render most important services without as a usual thing indulging in illegal price practices. They provide for an exchange of information about the basic facts of production costs, market conditions, trade statistics, credit ratings, standardization of qualities and grades, freight and traffic matters, labor policies, trade legislation, insurance rates. Trade associations were encouraged during the war as a medium by which government agencies could direct industry effectively toward meeting war time conditions. They furnished a definite organization through which the War Administration could communicate its wishes to the hundreds of thousands of individual companies the country over. The advantages of coöperation became so apparent that trade associations did not wane. after the war, but grew in strength and membership. The coöperative efforts of trade associations to supply information on production costs have led to greater uniformity in prices in many cases. The trade information is often kept strictly in the hands of members, with the result that although there may not be collusion or definite agreement on price policies, there is created a fairly uniform price control. Each man acts upon the same exclusive information as the other members of his trade association, and the uniform price action resulting has substantially the same effect in many cases as though it were the outcome of collusion among traders. The legal status of such trade association policies is not yet clearly determined. It would appear reasonable and possible to retain the constructive services and coöperative features of trade associations and to discard whatever undue monopoly influences attempt to assert themselves, 20

19 Samuel Untermyer, Hearings Before Senate Interstate Commerce Committee, V, p. 214. 20 See special reports of Federal Trade Commission in 1921 on Trade Associations and Open Price Associations. Also J. E. Davies, Commissioner of Corporations, 1915, Trust Laws and Unfair Competition, Chapter XI. The legal status of

Limits to Monopoly Influence on Prices.-Efforts to maintain monopoly prices are subject to certain limits and restrictions of a very important nature. Economic and political forces combine to put checks upon monopoly ambitions after they have passed certain limits.

1. Limit in Demand. A monopoly in a necessity of life may at times drive prices to extraordinary heights because people cannot do without, no matter what the price. The era of specialized manufacture has brought into the market so many articles which were at one time luxuries or comforts, but have become by custom and habit virtual necessities that monopoly in these lines can count upon a fairly stubborn and insistent demand.

2. Limit in Potential Competition. If a monopoly pushes the prices of goods so high that profits are great, competitors will probably be drawn into the field. The new competitors will then engage in a price war with the old business combination, and after a time, the combination may buy out, or crush the competitor, or the competitor may survive, and continually harass the original combination with its competitive prices. Although potential competition is existent and may possibly enter the actual field at any time, nevertheless prospective competitors are likely to think twice before sinking their time and money in many lines of business, realizing full well the ruthless attitude of many big companies toward venturesome competitors. Inertia, too, works against a ready entrance of competitors into lines of business where prices and profits are high. Hence, although potential competition serves to keep monopoly efforts within certain limits, those limits are highly variable and indefinite.

3. Limit in Possible Substitution. If the price of beef runs too high, people can eat mutton or pork. If gas rates are put too high, electricity is likely to come in. If the price of one form of article becomes exorbitant, buyers can pass it by and purchase substitutes. Monopolists who experiment with prices face the imminent danger of losing trade altogether by driving buyers to use articles which will give practically an equivalent of satisfaction and utility.21

4. Limit in Public Control. When trusts and all forms of big business first made their appearance, the country was naturally bewildered. to know how to handle the new phenomena. While legislatures were experimenting with various types of laws, and courts were maturing judicial viewpoints, it was possible for monopolies to take advantage of the situation, and indulge in practices of unfair competition, price discrimination, and price boosting which have later come under the ban of the law. The Sherman Anti-trust Act of 1890 has been interpreted as disapproving any conspiracy or monopoly in undue and unreasonable restraint of trade. After the law had been on the statute books for

the open competition and open price policies of trade associations is still indistinct. See F. D. Jones, Trade Association Activities and the Law.

21 See J. A. Hobson, Evolution of Modern Capitalism, pp. 230-235; J. B. Clark and J. M. Clark, The Control of Trusts, pp. 28, 123-127.