Beyond Competition: The Economics of Mergers and Monopoly Power.

• Author: 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...