ABSTRACT
ADAM SMITH, Wealth of Nations, Book II, Ch. V. THE problem of new competitors always besets combinations, either of manufacturers or of traders, however strong they may be. It may arise in many different ways. In all but the rare cases of a complete or almost complete monopoly, there is always a danger that new outsiders may join those already in existence. The fear of this certainly influences the combination when it frames its price policy. Again, there is a "danger" that the number of competitors within the combination itself will grow. If prices are so regulated as to leave wide profit margins, the cartel must fear the growth of a large number of new producers all seeking to exploit these very favourable, conditions. Permission to enter the cartel cannot easily be withheld. In industrial combination the weapon against the development of such conditions as would lead to the renewal of competition is the quota or allocation system, which limits the output of each member of the combine according to the collective view of market prospects. But such a procedure is not wholly satisfactory. The total tonnage to be allocated may become smaller; each member's share must diminish. This may happen by overproduction "within" the cartel caused by the entry of new producers, but it may also happen through a slackening of the demand. Whatever the cause, the works with highest costs will be hit hardest; their marginal rent will disappear; a scramble for better quotas will begin. At this stage, the big producers in the industry may buy others' shares of tonnage, and a trust movement will proceed within the combine. The effective control of single units thus becomes an indirect means of maintaining the price level.
