5.4
However elementary and well-known that argument is (or fehould be), it
is worth restating it in another form by saying that MG, the gap between
the price maker’s price and MC, measures not only his monopoly power but
also the worth to him of the marginal transactions he makes and the marginal
customers he exploits. Accordingly, the greater his monopoly power, the
more he values the custom of the price takers facing him. Yftien he gains
a lot from additional sales and loses a lot by losing some of his established
clientele, he goes out of his way to hold on to the market he has and to
expand it. As part of his efforts to accomplish those aims, he
accommodates his price takers, offers them fringe benefits and otherwise
courts their favor.
Contrast that to the seller’s very different behavior in a perfectly
competitive market, where he pushes all transactions to the margin of
indifference and — making no profit on the marginal
transaction -- is correspondingly indifferent to the marginal transactor
facing him. The contrast is important, because just as price is determined
on the margin, so are all other aspects of the market relationship as well.
You may have noted that I switched terminology: from nonprice competition,
which the price maker finds profitable to engage in, to calling the same thing,
or the consequences of the same thing, fringe benefits, which the price takers
value and find attractive. For nonprice competition provides a buyers 1
market, with all its familiar manifestations: the offer of information, great
variety, an ample inventory of different sizes, styles and colors, the