Tobin's q, Unionization, and the Concentration-Profits Relationship

This article uses Tobin's q, the ratio of the market value of a firm to the replacement value of its physical assets, to measure monopoly power and to examine the relationship between market structure and profitability. Tobin's q is a better measure of monopoly profits than indices of single-period profitability because it measures long-run monopoly power. In addition, it is subject to less measurement error and it contains an adjustment for risk. The relationship between q and long-run monopoly power is established. Provided that all inputs are supplied competitively, q should be highly sensitive to even small amounts of monopoly power. Since the level of q is generally not high in the American economy, the result suggests either that monopoly power is absent or that unions manage to capture monopoly rents. Empirical tests of the relationship between Tobin's q and measures of market structure and unionization provide evidence that unions do capture most monopoly rents.