The economics of sellers' competition;: Model analysis of sellers' conduct

THE ECONOMICS OF SELLERS' COMPETITION Model Analysis of Sellers' Conduct

THE ECONOMICS OF SELLERS'

COMPETITION Model Analysis

of Sellers'Conduct

by FRITZ MACHLUP H utzlet' Professor of Political Economy The Johns H opkins University

1 95 2 Baltimore:

The

Johns

Hopkins

Press

Books by

FRITZ MACHLUP

Die Goldkernwlihrung (1925) Die neuen Wiihrungen in Europa (1927) Borsenkredit, Industriekredit und Kapitalbildung (1931) Fuhrer durch die Krisenpolitik (1934) Guide travers les panacees economiques (1938) The Stock Market, Credit and Capital Formation (1940) International Trade and the National Income Multiplier (1943) The Basing-Point System (1949) The Political Economy of Atlonopoly (1952) The Economics of Sellers' Competition (1952)

a

Copyright 1952, The Johns Hopkins Press. Distributed in Great Britain by Geoffrey Cumberlege, Oxford University Press, London. Printed in the U.S.A~ by VaU-Ballou Press. SECOND PRINTING, 1956 TI:IIRD PRINTING, 1960 FOURTH PRINTING; 1964

Author's Preface ALTHOUGH a clear and readable style of writing has been one .fl.of my major objectives, I doubt that this book will make suitable reading for the raw beginner in the study of economics, unless he is. very smart I shall be very happy if I have succeeded in writing· a .book suitable for both the intermediate and advanced student.and also for the expert in the field.· I realize that an expert gets easily bored· if he has to trudge over wide stretches of familiar ground. But to publish only for the expert-jumping over everything that he may be expected to know well-is nowadays a luxury that professional journals can afford, but not the publishers of books. The writer of a book must address a somewhat wider audience and must go· over much of the ground that less advanced students have to cover if they are to comprehend the entire discussion. ·But often a fresh approach to a subject, starting from first principles, may hold new insights even for the most jaded specialist. If I have succeeded in my endeavours, this book should be useful in many courses in intermediate and advanced economics. Its sub-title, Model Analysis of Sellers' Conduct, is not meant to advertise it ·asa model of analysis, but to indicate that it emphasizes the method of analysing economic problems by constructing and manipulating well-designed models of relevant human conduct. This emphasis, . I hope,. will be·useful far beyond the subject matter of this book and may .make its study worth while even in courses in which "competition and monopoly" is only a smallpor:tion of the agenda. Although I recognize the power of mathematical arguments and the usefulness of· geometric aids in economic analysis, I have made little use of them. The 26. graphs and the one page of algebra that are included in this book are not part of the text and thus can be skipped with the greatest of ease. While this may please the majority of readers, I shall perhaps be chided for it by my critics. But it has been my aim to keep the book as far as possible within the confines of literary economics.

[v]

vi

AUTHOR'S PREFACE

The plan of the book is probably clear from the table of contents: an introductory Part I, offering a discussion of the methodological issues pertinent to the "theory of the nrm" and of the concepts basic for the analysis of sellers' competition, is followed by six. parts whose titles indicate the system of organization of the analysis: l:'Many Sellers," l:l:More Sellers," l:'Many and More Sellers," "Few Sellerst l:'Few but More Sellers," and "One Seller." That the last part, on "One Seller," consists of only one chapter, while the part on "Few Sellers" extends over five chapters, will probably be found to be indicative of my judgment of the relative importance of the respective topics. The relationship of the present book to some of my other actual, planned, or announced publications on the subject of competition and monopoly may be brieHy explained. This book, together with its companion volume, published under the title The Political Economy of Monopoly: Business, Labor and Government Policies, takes the place of the previously announced book "On the Economics of Competition and Monopoly." Questions of governmental economic policy with regard to monopoly and competition, the institutional sources of monopoly power, the various types of monopolistic business practices, the effects of monopolistic wage policies, the attempted measurements of the degree of business monopoly, and several other issues concerning the political economy of monopoly are discussed in the companion volume. The present book is confined to the economic theory f competition in selling, though it cannot cover all of it: for example, the analysis of discriminatory pricing is deferred to a separate book on "The Economics of Price Discrimination," planned for publication in future years. Some sections of the present book have been published elsewhere. Large parts of Chapters 2 and 3 were contained in myarti.. cle on l:'Marginal Analysis and Empirical Research," published in the American Economic Review, Vol. XXXVI (1946), pp. 519554. An Italian translation of the bulk of Chapter 4 was published under the title l:'Tipi di concorrenza nella vendita" in the Giornale degli Economisti, Vol. XIX (New Series Vol. III, 1941),pp. 129150. Most of Chapters 7 and 8 was published as an article under the title "Competition, Pliopoly and Profit" in Economica, New

AUTHOR'S PREFACE

vii

Series Vol. IX (1942), pp. 1-23 and 153-175. A part of Chapter 10. is being published in a German .translation under the title "Volkswirtschaftliche Scheinverluste ,beim·Zustrom neuer Wettbewerber," in Ordo, Vol. V (1952) . Chapter 11 was published as an article entitled "Characteristics and Classifications of Oligopoly," in Kyklo8, Vol. V (1952), pp. 145-1Sg; and a section of Chapter 13 under the title "Oligopolistic Indeterminacy" in the Weltwirtschaftliches Archiv, Vol. 68 (1952), pp. 1-19. The number of my intellectual creditors is too great to permit a full accounting of my indebtedness. But it would be most ungrateful not to acknowledge the great impact on my thinking of the writings of Joan Robinson, Edward·H. Chamberlin, and Frank H. Knight. Footnote references to their published work, however numerous, cannot possibly suffice to show how much of theirs reappears in this book. In the development of my views on methodology lowe much to Alfred Schutz, social philosopher of the New School of Social Research. For friendly criticism of ·earlier parts of my manuscript I am indebted to John D. Sumner, of the University of Buffalo, who read Chapters 4 to 10; Arthur Smithies, of Harvard University, who read Chapters 6 and 7; and a good many students in my courses at the University of Buffalo, Stanford University, and the Johns Hopkins University. My greatest debt is to Edith Tilton Penrose, of the Johns Hopkins University, who read the entire manuscript and suggested countless improvements. I also acknowledge gratefully financial aid, for editorial and clerical expenses, from the Lessing Rosenthal Fund for Economic Research at the Johns Hopkins University. FRITZ MACHLUP

Baltimore, Maryland, July 1952

"

Table of Contents AUTHOR'S PREFACE

v

Chapter

1. 2.

3. 4.

PART I-THEORY OF THE FIRM AND TYPES OF COMPETITION Model Analysis and Observation: Prices and Costs The Theory of the Finn: Marginal Analysis of Prices, Inputs, and Outputs . The Practice of the Firm: Empirical Evidence and Counter-Evidence Types of Competition in Selling Appendix: Types of Competition in Buying

3

27 57 79

126

PART II-MANY SELLERS

5. Perfect and Imperfect Polypoly

135

Appendix: Marginal Revenue and Elasticity of Demmd 6. Polypolistic Nonprice Competition and Other Forms of Non-Perfect Polypoly

161

PART III-MORE SELLERS 7. Pliopoly: Newcomers to a Profitable Industry 8. Pliopoly: Profits, Rents, and Artificial Scarcity

211 242

PART IV-MANY AND MORE SELLERS 9. Polypoly and Pliopoly Combined, When Both Are Perfect 10. Polypoly md Pliopoly Combined, When· Either or Both Ar~ Imperfect

~

273 300

PART V-FEW SELLERS

11. Characteristics and Classifications of Oligopoly 12. Classical Duopoly Theories and Their Modem Ex-

347 368

tensions [ix ]

x

TABLE OF CONTENTS

Chapter 13. Oligopolistic Indeterminacy and Collusion 14. OligopolisticNonprice Competition and Price Rigidity 15. Organized Oligopoly, Leadership Oligopoly, Unorganized Oligopoly

414

449 475

PART VI-FEW BUT MORE SELLERS

16. Oligopoly and Pliopoly Combined

517

PART VII-ONE SELLER

17. Monopoly INDEX

543 567

Analytical Table of Contents Chapter PART I-THEORY OF THE FIRM AND TYPES OF

COMPETITION

1. Model Analysis and Observation: Prices and Costs

3

A Note on ModeZ AnaZysis:Abstractions, Constructs, Models · Theoretical and Descriptive Economics · Models .in the Theory of.· Price The Economy, the Industry, the Firm: The Selection of Models· The Comparison of Prices · The Profits of Enterprise The Lack of Actual Price and Cost Data: The Selling Price · The. Dating of the Data · Total Cost of Production . The Average Cost of the Actual Output . The Marginal Cost of the Actual Output . Hypothetical Price and Cost· Schedules

2. The Theory of the Firm: Marginal Analysis of Prices, Inputs, and Outputs Conduct Models of. the .Firm . The Marginalist Way of Thinking . The "Determination" of Prices, Output and Input . Subjectivity. of Cost and Revenue · The· Omission of Important Variables · The Range of Price and Output Variations · The Time-Range of Anticipations · The Numerical Definiteness .of .the Estimates · The "Extreme Difficulty of Calculating" . The Analysis of Change Needs no Exactness · Non-Pecuniary Considerations· Maximum Profit versus Security· Maximum Profit versuS Most-Favored Odds

3. The Practice of the Firm: ·Empirical Evidence and Counter-Evidence Economists' Vocabulary and Business. Language • Rationalizationsof Decisions or Actions . Averaging Fluctuating Costs and Prices . Actual versus Potential Average Costs. · Average-Cost Pricing as the Lawyer's Ideal· Average-Cost Pricing as the Accountant's Ideal . Average-Cost Pricing as a Cartel Device· Average Cost as a Clue to Long-Run Demand. Elasticity · Reasons and Variables· Research on Actual Pricing Methods · The Absence of Numerically Expressed Estimates · The Evaluation of Empirical Evidence [ xi ]

57

xii

ANALYTICAL TABLE OF CONTENTS

COOpfuf

'

. A Re-evaluation of the Claims· Who Can Afford to Pass Up Profits? . The Break-Even Chart· Theory and Practice

4. Types of Competition in Selling

79

Competing Connotations of f:f:CompeUtion": Qualifying Adjectives . Competing Goods and Competing Sellers· The Seller's Methods of Getting Business· The Buyer's Choice of Sellers Polypoly: A Seller Among Very Many · The Polypolist Without Choice of Prices . Horizontal Demand Curves . Pure Competition and Its Synonyms . The. Polypolist with a Choice of Prices . Illustrations . Tilted Demand Curves " Limited Sales Opportunities for Differentiated Products Oligopoly: The Seller Conscious of Rivals' Reactions . OneWay Demand Curves· To Watch and To Be Watched" Many, Few, Two, One Pliopoly: Many Sellers and More Sellers . Contrasting the Logical Nature of the Concepts· Pre-Conditions of Newcomers' Competition . Entrance and Exit · The Seller Conscious of Potential Newcomers Monopoly: The Seller Without Competitor " The Demand Curve for the Monopolist's Product· No Entry Perfect Market: Perfection of a Market." Comparison of the Concepts ." Knowledge · Accessibility" Absence of Restrictions." Reservation Prices " The Comparison of the Concepts Resumed Summary: Different Classifications

Appendix to Chapter 4. Types of Competition in Buying Polypsony: Perfect Polypsony " Imperfect Polypsony Oligopsony: The Supply as Seen by the Rival-Conscious Buyer . Illustrations Pliopsony: The·Profitable Industry· Monopsony: Three Criteria .. Each Firm Deals in Many Markets,

126

ANALYTICAL TABLE OF CONTENTS

xiii

Chapter PART II-MANY SELLERS

5. Perfect and Imperfect Polypoly

135

The Characteristics of· Polypoly: The Criteria · ,Three Reminders Perfect Polypoly: The Volume of Output under Perfect Polypoly . Two Problems: Subjectivity and Time . The Volume of Output and the Size of the Firm ..• The Size of· the Firm under PerfectPolypoly Imperfect Polypoly: The Volume of Output under Imperfect Polypoly . Restricted Production . The Size of the Firm under Imperfect Polypoly Transport Costs: Differentiation through Transport Costs· Centralized Market · Location and Competitive Position · Transport Cost and Plant Size

Appendix to Chapter 5. Marginal Revenue and Elasticity of Demand 6. Polypolistic Nonprice Competition and Other Forms of Non-Perfect Polypoly Polypolistic N onprice Competition: Institutional Pricing Factors '. Oligopolistic Considerations . Competition Invigorated or Weakened · Standardization, Differentiation, and Price Maintenance· The Degree of Competition through Quality Differences Polypolistic Quality Competition: The "Measurability". of Quality . Quality Determination with Variable Selling Prices.· Quality Determination and Demand Elasticity · The Effects of Improvements upon Demand· Quality Determination with Fixed Selling. Prices Polypolistic Competition Through Selling Effort: Selling Effort vs. Improved Quality · Relationship Between Selling Cost and Demand . The Effect of a Given Selling Effort . Variable Selling· Efforts and Variable Prices . Selling Costs vs. Production Costs · Determination of Selling Effort with Fixed Selling Prices Quasi-Perfect Polypoly: The Limitof the Horizontal Range . The Causes of the Horizontality . The Demand for the Product of the "Follower" . Unlimited Offers to Purchase

159 161

xiv

ANALYTICAL TABLE OF CONTENTS

Chapter The Rise or Decline of Polypoly: Empirical Findings · Growth of Size of Firms and. Markets Imperfect Polypoly and General Equilibrium: Price and Sales Expectations . Objective Changes and Subjective Expectations PART III-MoRE SELLERS

7. Pliopoly: Newcomers to a Profitable Industry

211

The Nature and Prerequisites of Pliopoly: The Distinctions Recapitulated · .The Pre-Conditions Summarized The Industry: Limiting the Scope of Interdependence . The Boundaries of the "Industry" Profit: Business Profit .versus Economic Profit· Transitory and Long-Run Profits . Fixed Resources and Normal Profit . Supernormal Profits and Entry . Subnormal Profits and Exodus Entrepreneurship and Uncertainty: The Quality. of Entrepreneurship . Managerial Services . Uncertainty . The SafetyMargin in Profit Estimates Indivisibility and Immobility: Indivisibility · Indivisibility and Uncertainty Combined· Immobility· Profits versus Imputed Rents· The Case of Cheap Resources

8. Pliopoly: Profits, Rents, and Artificial·· Scarcity Advance Calculations of Profits: Rents and Profits, Ex .Ante and Ex Post.· Discrepancies in Profit Calculations . The Relevant Profit Calculations· Advance Calculation and Prospectus · Accounting and Economic Concepts Costs, Rents, and Profits: The Distribution of Total Revenue . Profits as Seen by Outsiders, Insiders, and Economists Supernormal Profits and Their Causes: Positive Profits Seen by the Outsider . No Profits Seen by the Outsider . The Economist's Dissenting Calculation . Monopoly Rents in the Form of Factor Costs Artificial Scarcity: Natural and Artificial Scarcity . Monopolistic Barriers

242

ANALYTICAL'TABLE OF CONTENTS

xv

Chapter PART IV~MANY AND MORE SELLERS

9. Polypoly and Pliopoly Combined, When Both Are Perfect

273

Group Equilibrium and Marginal Units: Simultaneous Equilibria · Different Meanings of Marginal . Perfect Polypoly and Perfect Pliopoly: Maximization and Equalization of Profit Rates . The Danger of Equivocation . The Adjustment of Price Expectations· A 'Model Sequence of Price Adjustment . The Dispersion .of Expected Prices During Transition Periods · The Adjustment of Cost Conditions . Average Cost Inclusive of Rent · The Transformation of Implicit Rent into. Money Cost Capacity Output and Optimum Size: Lowest-Cost Output and Size of the, Firm · Quasi-Rent and Scarcity Rent

to.

Polypoly and, Pliopoly Combined, When Either or Both Are Imperfect Perfect Polypoly and Imperfect Pliopoly: Concrete Examples and Theoretical Models· Excessive Size and Excessive Outputs Imperfect Polypoly and Perfect Pliopoly: Under-utilized Capacity in an Undersized Firm· Price, Cost, and Sales Expectations·· The Adjustment of ,Sales Expectations . The Predicted Equilibrium Position ,Excess Capacity under the Tangency Rule: The Four Interpretations ,. The Limits of Applicability· The Differential Rent of Differentiated Polypolists . Implications Concerning Unused Capacity and Potential Economies The Wastes of Newcomers' Competition: Product Variety at Higher Cost· Nine Reasons for Higher Cost of Smaller Scale · The Significance of the Nine Points · Three Other Reasons of Higher Costs . Weighing the Losses and Benefits Imperfect Polypoly and Imperfect Pliopoly: Product Differentiation asa Barrier to Entry ·A Common Cause for Both Imperfections . Political Interference with Entry · The Effects upon Total Output · Low Price Policy to Prevent Entry

300

xvi

ANALYTICAL TABLE OF CONTENTS

Chapter PART V-FEW SELLERS

11. Characteristics and Classifications of Oligopoly Terminology

347

.

The Characteristics, of Oligopoly: The Monopoly Power of the Oligopolist,· The Many and' the Few · Objective Cir·· . cumstances Behind Subjective Attitudes' . The Emphasis on Price Policies . The Oligopoly Demand Curve . Split Personality Classifications of Oligopoly: ,Alternative Principles of Classification· The Degree of Coordination· Fight, Truce and Peace

12. Classical Duopoly Theories and Their Modem Extensions

368

.Classical Duopoly Models: Mathematics, Geometry, and English . Assuming a Market Demand Schedule· The Cournot Model· The Bertrand Model· The Edgeworth Model Comparisons of the Classical Models: Prices and Production . Expected Reactions of Rival . Own Reactions to Rival . Summary of Comparisons . Uniformity of Market Prices · Buyers' Indifference versus Inertia Extensions of the Classical Models: Modifications of Assumptions . Product Differentiation· The Shape and Similarity of' Cost Functions . Asymmetry of Attitudes · Guessing Definite Countermoves· '.Quasi-Collusive Behavior Patterns· More Variables: Product Quality and Sales Promotion . More Than Two 'Sellers

13. Oligopolistic Indeterminacy and Collusion Oligopolistic Indeterminacy: The 'General Meaning of Indeterminacy · Pure and Applied Economics· Anonymous Masses and' the Conduct of Individuals . Extra-Economic Factors· Position, Security, and Profit · Military Strategy and Games of Strategy . The Strong Sparing the Weak The Forms and Degrees of Collusion: Coordination, Collusion, Cooperation . The Rationale of Collusion . The Degrees of Collusion· The Forms ,of Collusion· Implicit Agreements to Agree, and Other Quasi-Agreements· The Comprehensiveness of Collusion

414

xvii

ANALYTICAL TABLE OF CONTENTS

Chapter Oligopoly and General Equilibrium: Polypolistic and Oligopolistic Expectations - The General Equilibrium Model

14. Oligopolistic Nonprice Competition and Price Rigidi~ Oligopolistic Nonprice Competition: The Nonprice Variables - Some Important Distinctions · Limits to the Practice of NonpriceCompetition -The Significance of Oligopolistic Quality Competition · Determination of Outlay for Nonprice Competition

~9

Oligopolistic Price Rigidity: The Concept of Price Rigidity · ~neral Causes of Price Rigidity · Reasons Applying to Oligopoly Only · The Kink Theory of Price Rigidity

15. Organized Oligopoly, Leadership Oligopoly, Unorganized Oligopoly "" " Org~nize~ Oligopoly: Types .of Organize~· Oligopoly ·oAp-

475

proxunation to Monopoly Polley The Policy of a Syndicate o The Policies of a Price Cartel and Its Members · "Member's Conduct under Given Cartel Rules · Member's Conduct With an Eye to Renegotiations - The Theory of Cartel Negotiations · The Cartel Government 0

Leadership Oligopoly: Different Concepts of· Leadership · The Qualifications of the Leader .. "Partial. Monopoly" and cCPartial Oligopoly" · Rotating and Divided Leadership

Unorganized Oligopoly: Unorganized Cooperation · Types of. Uncoordinated Oligopoly . Fighting Oligopoly · HyperCompetitive Oligopoly . Chain Oligopoly · Guessing-Game Oligopoly Historical Trends: Speculative Clues · Historical Clues

PART

VI-FEW

BUT MORE SELLERS

16. Oligopoly and Pliopoly Combined

. " 517

Combined Effects ana Interaction: Pliopoly Affecting Oligopoly · Oligopoly Affecting" Pliopoly Free Entry, Gluts, and Oligopolistic Control: Free Entry Without Entrants · Cartels as Children of Depression · Restriction Warranted in Overexpanded Industries?

xviii

ANALYTICAL TABLE OF CONTENTS

Chapter

.

Oligopoly, Entry, and Excess Capacity: Cartels in Open Industries . Mergers and Concentration in Open Industries . The Essential Differences The Threat of Potential Competition: How to Keep Them Away • Sacrificing Short-Run Profits · Sectional and Chain Oligopoly PART

VII-ONE

SELLER

17. Monopoly The Characteristics .of. Monopoly: The Definition · c'Pure Monopoly" . Cross-Elasticity of. Demand· Instances of Monopoly The Absence of Pliopoly: Temporary versus Lasting Positions . Natural versus ArtificialObstacles . Subjective versus Objective Judgments L~ng-Range Monopoly Policies:. Perfect Monopoly and the Confident .Monopolist . Non-Profit Objectives

8.hort-Range Monopoly Policies: The Pessimistic Monopolist . Pessimism, Optimism~nd Progress l"fperfect Monopoly: Potential Competition' Distinctions and Differences . Potential Government Sanctions and Organized Reaction . Restraints Due to Bilateral. Monopoly Join~

Supply, Related Demand, Di$orimiruitory Pr.icing

543

List of Graphs Fig. Page MARGINAL REVENUE AND ELASTICITY' OF DEMAND

1

160

2

172

3

174

4

176

5

180

'6

186

7, '8

187

9

188

10

190

11

192

12

193

13

277

DETERMINATION OF PRODUCT QUALITY

I.. Imperfect Polypoly, Price and Quality Competition II. Perfect Polypoly, 'Choice among Standardized Qualities, Saleable in Unlimited Quantities at Given Differential Prices III. Imperfect Polypoly, Price 'and' Quality Com~, petition IV. Imperfect Polypoly, Quality Competition' at a Fixed Price THE EFFECT OF A GIVEN SELLING EFFOI\T

I. Sales Opportunities at Various Prices With and Without Selling Campaign II., Effects of Selling Effort on Demand Prices and Quantities Demanded III. Dynamic or Time-Sequence Analysis of ~ffects of Selling Campaign IV. Demand as 'Schedule of Maximum Prices or Maximum Quantities Obtainable by Any Sequence of Steps DEMAND PRICES NET OF SELLING COSTS

I. Alternative Selling, Prices With Different Selling Costs and Resulting Average Net, Revenues II. Maximum Average Net Revenue or Demand Prices .With the Cost of Optimal Selling Techniques 'Deducted PERFECT POLYPOLY AND PERFECT PLIOPOLY

Tangency of Horizontal Demand Curve Wjth Average Cost Curve [xix 1

xx

LIST OF GRAPHS

Fig. Page

THE

INCLUSION OF RENT IN AVERAGE COST

Tangency of Increased Demand Curve With Average Cost Curve Secured Through Rent Increase

14

289

15

294

16

305

17

307

18

320

19

332

Price Insensitivity to Changes in Cost or Demand 20, 21, 22

472

COST OF PRODUCTION WITH DIFFERENT SIZES OF

FmM The Long-Run Cost Curve as a Composite of All Short-Run Cost Curves PERFECT POLYPOLY AND IMPERFECT PLIOPOLY

No Tangency of . Horizontal Demand Curve and Average Cost Curve IMPERFECT POLYPOLY AND PERFECTPLIOPOLY

Tangency of Sloping Demand Curve With Average Cost Curve MONOPOLISTIC UNDER-UTILIZATION AND MONOPOLY PROFIT

Imperfect Polypoly With Excess Capacity Depending on Interpretation of Rent IMPERFECT POLYPOLY AND IMPERFECT PLIOPOLY

No Tangency of Sloping Demand Curve With Average Cost Curve OLIGOPOLY AND KINKED DEMAND CURVES

CONDUCT OF A CARTEL MEMBER

I. Total, Average, and Marginal Revenue of a Secret Price Cutter II. Output Reduction Due to Sanctions for Excess Sales

23

483

24

485

25

497

26

559

PARTIAL MONOPOLY WITH SMALL COMPETITORS

Elasticity of Demand for Large Firm's Output Increases With the Size and Elasticity of Supply from Small Competitors IMPERFECT MONOPOLY

A Price Zone Safe From Competition Bordered by Zones of Potential Competition

PART I-THEORY OF THE FIRM AND TYPES OF COMPETITION

CHAPTER

l'

Model Analysis and Observation: Prices and Costs A Note on Model Analysis: Abstractions, Constructs, Models • Theoretical and Descriptive Economics · Models in the Theory'of Price The Economy, the Industry, the Firm: The Selection of Models · The ' Comparison of Prices · The Pronts of Enterprise The Lack of Actual Price and Cost,Data: The Selling Price· The Dating of the Data· Total Cost of Production· The Average Cost of the Actual Output · The MarginalCost of the Actual Output · Hypothetical Price and Cost Schedules

certain aspect,s of human a,ction',eco,nomists do not look at the "whole man" but rather at man as consumer, ,worker" employer, tenant, landlord", saver, 'investor, buyer, seller. This book deals only with the seller, indeed only. with the"seller for profit." The seller for profit is customarily called a business firm" and the analysis of sellers' conduct is usually treated under the heading "theory of the firm," although this is a rather big name for so narrow anaspe,ct of,business behavior. We shall have a'good deal to say in these early chapters about the deliberate narrowness of the theory of the firm as a part of the "theory of relative pi-ices" and, of the "economics of competition ,and monopoly." , "Price" and "selling" are concepts that necessarily go together: there can be no sale without a price, and there can be no price with~ out a sale-at least, without a sale in mind. Economic analysis of selling prices., calls for comparisons bet\Veen different. prices and for comparisons of prices with "costs~" Costs and prices are indispensable data in any theoretical or empiri