Coase(1972) - Durable and Monopoly[2]

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DURABILITY

AND

MONOPOLY

R. H. COASE Universityof ChicagoLaw School

that A SSUME a supplier owns the total stock of a completely durable good. At what price will he sell it? To take a concrete example, assume that one person owns all the land in the United States and, to simplify the analysis, that all land is of uniform quality. Assume also that the landowner is not able to work the land himself, that ownership of land yields no utility and that there are no costs involved in disposing of the land. If there were a large number of landownersand the price were competitively determined, the price would be that at which the amount demandedwas equal to the amount of land in the United States. If we imagine this fixed supply of land to be various amounts either greater or smaller, and then discover what the competitively determinedprice would be, we can trace out the demand schedule for American land. Assume that this demand schedule is DD and that from this a marginal revenue schedule, MR, has been derived. Both schedules are shown in Figure I. Let the total amount of land in existence be OQ. Then, if the price were competitively determined,the price would be OB (see Figure I). We now have to determine the price which the monopolistic landowner would charge for a unit of land in the assumed conditions. The diagramwould seem to suggest (and has, I believe, suggested to some) that such a monopolistic landownerwould charge the price OA, would sell the quantity of land OM, thus maximising his receipts, and would hold off the market the quantity of land, MQ. But suppose that he did this. MQ land and money equal to OA X OM would be in the possession of the original landowner while OM land would be owned by others. In these circumstances, why should the original landownercontinue to hold MQ off the market? The original landownercould obviously improve his position by selling more land since he could by this means acquire more money. It is true that this would reduce the value of the land OM owned by those who had previously bought land from him-but the loss would fall on them, not on him. If the same assumption about his behaviour was made as before, he would then sell part of MQ. But this is not the end of the story, since some of MQ would still remain unsold. The process would continue as long as the original landowner retained any land, that is, until OQ had been sold. And if there were no costs of disposing of the land, the whole process would take place in the twinkling of an eye. 143

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THE JOURNAL OF LAW AND ECONOMICS

Figure
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QUANTITY MR
It might be objected to this supposedbehaviourunder which land is sold in separate transactions involving blocks of land, probably of diminishing size, that it would be even better if the landowner sold the land by infinitesimal units, thus maximising his total revenue. But this is neither here nor there. Whatever the intermediatesteps are assumed to be, OQ land will be sold. And given that OQ is going to be sold, the value of a unit of land is going to be OB and given this, no buyer of land will pay more than OB for it. Although the demand schedule may be correctly drawn in that, if the quantity of land is OM, the price would be OA, the landownerwould find himself in the position that, if he were charged more than OB, he would sell nothing. The demand schedule facing the original landowner would be infinitely elastic at the competitive price and this even though he was the sole supplier.With complete durability, the price becomes independent of the number of suppliers and is thus always equal to the competitive price.

DURABILITYAND MONOPOLY

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How could the landowner avoid this result? He could do this and obtain the price OA from the sale of OM land by making special contractual arrangements with the purchasersof land by which, as a condition of sale, he agreed to...
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