Commentary on the Comparisons

THE comparisons of monopoly and competitive output which have been made in the last chapter make it possible to clear up a common confusion. It is often said that a monopolist will restrict output by less the greater is the elasticity of demand for his product, and the more rapid is the rate of decreasing cost, or that he will restrict output more the less the elasticity of demand and the more rapid the rate of increasing cost.1 These propositions appear superficially plausible, for it is obvious that a monopolist gains more by restricting output the less is the elasticity of demand for his commodity, and the greater is the saving of cost due to a reduction of output. But the fact that they are fallacious at once becomes clear if we consider the case in which the demand and supply curves are straight lines. In that case, as we have seen, the extent to which the monopolist restricts output is exactly the same whatever the elasticity of demand or the rate of rising or falling cost. The fallacy lies in arguing that restriction will be carried furthest where it is most profitable to restrict at all. For instance, if there are two cases, in one of which the demand is more elastic than in the other, it is argued that because restriction will lead to a smaller monopoly net revenue in the case where the demand is more elastic, therefore the degree of restriction in that case will be less than in the case where the monopoly net revenue will be larger.