Beyond Competition: The Economics of Mergers and Monopoly Power.

Hemphill, Thomas A.

In his preface, Thomas Karier, professor of economics at Eastern Washington University, describes his book as one "about power; one that supplements a strong microeconomic analysis with historical examples and empirical evidence." In chapter one, two types of economic power are defined: monopoly power refers to the degree of practical control that firms have over their prices, and economic power is defined as the maximum potential profit of a firm. Monopoly and economic power, in the case of larger firms, will coincide. After a review of the history of monopoly power (from Adam Smith to Joan Robinson to Michal Kalecki) and its microeconomic origins (oligopoly theory and barriers to entry) in chapter two, chapter three reviews the standard monopoly model and proposes formulas for economic and monopoly power. In chapter four, the results of early empirical studies (1950-1980) measuring the relationship between price-cost margins to monopoly power reveal strong statistical support for the theory of monopoly power.

Chapter five presents graphical evidence of how labor unions reduce the monopoly power of the firm (higher wages and benefits increase marginal costs) and negatively impact on average economic power of the firm. In chapter six, the issue of whether firms pay for higher costs is explored. For an individual firm, costs are absorbed resulting in a subsequent loss in monopoly and economic power; economy-wide cost increases are felt industry-wide with increased factor supply costs being offset by increased factor demand revenues while both monopoly and economic power remain virtually unchanged. Chapter seven reviews the statistical results of a half-dozen studies of monopoly power (1984-1990) which, unlike earlier studies, include the effect of unions, and in some instances R&D and imports. The results of these studies show that monopoly power would be much greater if not for the "countervailing" effects of unions and imports.

In chapter eight, a thesis is put forth that all firms are not equally motivated toward a strategy of price competition. Firms exhibiting significant amounts of monopoly power or high capacity utilization tend to engage in nonprice competition. Other firms with economic power will simply maximize short-run profits and generate above average profits without provoking the retaliation of rivals. Chapter nine reviews both nonprice competition and cooperation among firms. Firms practicing nonprice competition are bargaining on future market shares and profitability (increased economic power) through financial investment in advertising and R&D. Firms with great monopoly power will seek out cooperative arrangements with rivals while those without may tend to favor competition. Horizontal, vertical, and conglomerate mergers and acquisitions are all evaluated in chapter ten. Using historical company examples such as Standard Oil Company and General Electric (horizontal mergers), Ford Motor Company (vertical mergers), and AT&T and IBM (conglomerate mergers), an explanation is given of how these large corporations acquired their present level of economic power by taking advantage of monopoly power in the formative stages of their development.

Global markets, discussed in chapter 11, reintroduces the classic theory of comparative advantage. However, evidence is offered that the actual pattern of U.S. manufacturing does not follow this theory of specializing in certain areas for export and surrendering other areas to imports. In essence, some U.S. industries export while others import because most industries are involved in both. Chapter 12 reviews the laws and regulations that encourage or restrict the accumulation of monopoly and economic power in the U.S. Patent and copyright laws are examples of government encouraging innovation and eliminating "free-rider" issues through the granting of a limited duration monopoly. However, limits on monopoly power that antitrust laws are designed to provide have not limited high levels of monopoly power from increasing in many sectors of the U.S. economy. Antitrust laws have only prevented market leaders from expanding their power by blocking mergers and acquisitions and limiting opportunities for price competition. The changing world economic order, the topic of the final chapter, concludes the book with the observations that the decline in union strength (only 12% of nonagricultural workers in the private sector in 1990) has shifted the distribution of economic surplus to favor executives and investors and that international competitiveness will continue to pressure countries to erect trade barriers to protect their national companies, although these barriers will involve less direct subsidies.

In Chapter five, Karier makes a case for union compensation affecting economic power. According to Karier, an increase in union compensation causes marginal cost to rise, the product markup curve to fall, and a reduction in monopoly power to ensue. The effect of reduced monopoly power is therefore likely to show up as a decline in average economic power and profitability. "Only in the most extraordinary circumstances would higher wages fail to depress potential profitability," says Karier.

Professor Karier, for reasons unbeknownst, seems to have virtually ignored a substantial body of research showing that high U.S. labor productivity offset some, if not all, wage gains for the first 25 years after the end of World War II. Unionized firms may have paid higher wages but they received higher levels (than non-union firms) of productivity in return. This is not to say that many individual firms or industries paid wages above their levels of labor productivity (and consequently reduced their economic power when higher prices could not be passed on to absorb these cost increases), but that there were numerous firms and industries also paying wages representative or below labor productivity increases. Modern labor-management operating agreements (post-1970s) include provisions that are intended to improve firm or industry productivity. The result can be a shift downward in the average variable cost and marginal cost curves.

The book provides a remarkably clear and concise exposition of monopoly power, offers an interesting look at a proposed definition of economic power, and adequately reviews the results of major statistical studies of monopoly power (and their research flaws) over the last forty years. Although mergers are mentioned in the title of the book, the author only briefly explores (one chapter) this area.