Nassau Senior on Monopoly

Nassau Senior on Monopoly

Ricardo's influence on Senior was considerable, even though they differed on several points. Senior maintained, for instance, that "Of the three conditions of value, utility, transferableness, and limitation of supply, the last is by far the most important." His discussion of value was therefore colored by a concern for those forces that limit supply (i.e., affect costs of production), among which he regarded the existence of monopoly as crucial. Four degrees of monopoly are considered by Senior:

1 A monopoly in which the producer does not have exclusive producing powers but in which he has exclusive facilities that he may use indefinitely with equal or increasing advantage (as in the case where exclusive patents are necessary to produce a certain product).
2 A monopoly in which the monopolist is the only producer but in which, because of the uniqueness of the product, he cannot increase the amount of his produce (as in the case of certain French vineyards, where increased output is impossible without destroying the unique properties of the wine produced).
3 A monopoly in which the monopolist is the only producer and can in­crease indefinitely, with equal or increasing advantage, the amount of his pro­duce (as in the case of book publishing, where the product is protected by copyright, and the relative cost of publication diminishes as the number of copies published increases).
4 A monopoly in which the monopolist is not the only producer but has pe­culiar facilities which diminish and ultimately disappear as output is increased. (This includes most cases of economic production, including agriculture, where land or fertility must ultimately run out as output is increased).

These four cases are important because the effect of each case on produc­tion costs either establishes or does not establish an upper and lower limit to market price and therefore opens the way for varying degrees of demand to determine price. In the first case, for example, market price comes closer to the seller's cost of production than any other monopolized commodity, since competition among sellers without the exclusive facility (e.g., patent) will tend to keep prices in line with their costs of production. The monopolist with the patent may, of course, enjoy pure profits, but is effectively barred from selling at a price above the nonpatented competition, although the actual price will depend on conditions of demand as well as on conditions of production.

The second case is that of completely inelastic supply, in which there is no upper limit on price save the level of demand, while the lower limit to price is equal to costs of production. The third case is the same as the first except that since the monopoly is absolute, there is no upper limit to price save that im­posed by demand. The fourth case is the most general. It includes production under conditions of differential advantage and diminishing returns. This is re­ally the Ricardian case, except that price depends not only on the production costs of the marginal firm but also on demand.

One has only to read Cournot and Senior side by side to realize how loose the theory of monopoly was before 1838. Nevertheless, by classifying the major cases of value the way he did, Senior succeeded in rec­onciling Ricardo's analysis with the supply-demand theory. A review of Se­nior's four cases reveals that cost of production is the controlling criterion in some cases and that demand is the controlling criterion in others, but the two are always interacting. It is true that Senior, having gotten this far, did not push the supply-demand analysis as far as he could have in evaluating the fac­tors of production, but he certainly made this task easier for those who were to follow.