Mises and Rothbard both held that a monopoly price could only arise if demand is inelastic. They make this argument in Human Action and MES*.* The argument is that if demand is elastic, any reduction in quantity reduces revenue (price * quantity); reduction only increases revenue if demand is inelastic.
In intro micro textbooks, the graphical analysis demonstrates that a monopolist can often maximize total profit by restricting sales, regardless of the elasticity of demand. This is because sellers care about profit (= revenue - cost), not just revenue.
To illustrate, assume the monopolist faces an elastic demand curve (in which case Mises and Rothbard deny that a monopoly price will emerge). At the competitive quantity, price = marginal cost = average cost, so there is zero profit (profits are eliminated at the competitive price). Now, if the monopolist restricts sales he will get a higher price. If this monopoly price exceeds the average cost for the monopoly-quantity, then he earns a profit. Thus, a monopolist will restrict sales even if demand is inelastic (so long as average cost is below the monopoly price).
Now, if Mises and Rothbard are assuming that the competitive quantity is produced but only the monopoly quantity sold (the rest destroyed), then costs are equal in both cases and profit depends only on revenue and hence elasticity of demand. But what if only the monopoly quantity is produced (the most realistic assumption)? Then the costs are less (because fewer units are produced). So optimality can only be determined by looking at both revenue and cost (i.e., profit); revenue only tells half the story.
So it seems that Mises and Rothbard are wrong here. Yet it seems highly unlikely that they would have made such a basic error. Am I missing something?
Did Mises contradict Rothbard on this point? I’m just starting his section on monopoly prices in HA, but he has already hinted at the existence of monopoly prices.
I haven’t read ME&S yet, but my understanding is that one of Rothbard’s big contributions to Austrian economic theory, and what helps to separate ME&S from simply being a rewrite of Human Action, is his work on monopoly price theory. That’s what I’ve read on the blogs and the twitters and such.
As Adrian said, it would be more apt to say that Rothbard contradicted Mises, because Mises wrote first. But yes, Mises does accept the possibility of monopoly prices.
That is only true in the wildly unrealistic imaginary construction of the ERE and in the wildly unrealistic AND un-useful neoclassical model of perfect competition.
you might argue that from a theoretical point of view, there is such a conception as a monopoly price. But ‘here is the vast array of prices paid in the world’; could you point out which one are monopoly prices?
The theoretical concept of a price that is caused by the circumstances that would cause a monopoly price, seems sound. But the Rothbardian point: that there is no way of distinguishing monopoly prices from market prices, seems to be correct.
Is this what you mean by sound? Or is there something else? Could you clarify a bit more?
Getting back to the question: why does revenue matter to a firm? Profit is the relevant metric. If we don’t assume destruction, then Mises seems to have erred, since with fewer units produced the lowered costs could outweigh the lowered revenue. It just seems like such a simple mistake… very unlike Mises.
No, that’s just another entrepreneurial decision that may or may not prove t, ex post, to be correct. The farmer thinks he has overproduced. If he knew better, he would have acted differently. He burns the crops to mitigate what he thinks are loses due to a previous calculation error. He can never have the assurance that burning the crops is the right thing to do.
EDIT:
Besides, what if he doesn’t burn the crops but puts aside 10%, and secretly plots to hand them over to charity upon depletion of the 90%.
Was the 90% sold at monopoly price according to you?
I’m still not sure what your question is, toban. Are you simply assuming there exists a monopoly, and so this monopoly firm can reduce quantity even with elastic demand? And whatever it is that you are arguing, are you sure Mises contradicts it? It’s quite an accusation to say that Mises neglects profit. For instance, he does write:
Mises does not only consider revenue. He considers NET revenue. Thus he does factor in the firm’s costs.
(Emphasis added…)
“If conditions are such that the monopolist can secure higher net proceeds by selling a smaller quantity of his product at a higher price than by selling a greater quantity of his supply at a lower price, there emerges a monopoly price higher than the potential market price would have been in the absence of monopoly.”
It does since your monopoly price is built on a fictional construct that does not exist, like the “perfect competition” construct, etc…
There is no way to determine, ex ante, if the burning of crops will earn the farmer more or less revenue, i.e, lowering or raising his profits. Therefore, it is impossible to conclude that the burning of crops will constitute a monopoly price.
It is also impossible to make an ex post comaparison between the two possible outcomes, for you cannot possibly conduct that experiment.
Your monopoly price presupposes to already know all the facts, which of course, is nonsense. Monopoly price is, therefore, a fallacious concept like perfect competition is.
Actual prices are data of economic history. And economic history is not an exact science. But just because the nature of a past event cannot be known with certainty, does not mean a certain event cannot have occurred.