To start this chapter, we need to clarify a common misconception. Under monopoly capitalism, small businesses still exist. However, they (small businesses) exist in an environment ruled and shaped by the giant corporation (the defining feature of monopoly capitalism). So just because there are other types of businesses in the economy, doesn’t mean we don’t live within a monopoly capitalist system. 

In this system, we see planning inside the corporations juxtaposed with a lack of planning for the overall capitalist system. This remains the case even when companies in one industry coordinate to serve their own ends, as we will see. This means that under monopoly capitalism, just like competitive capitalism, all relations still flow through the market. And market relations are essentially based on price. However, while the individual enterprises of competitive capitalism are ‘price takers,’ the monopoly capitalist giant corporations are ‘price makers.’ We need to understand how this makes the dynamics of these two different types of capitalist systems diverge.

Past analysis (prior to B+S’s time) had connected microeconomic firms and macroeconomic systems, showing how competitive price systems led to equilibrium outcomes in resource allocation, income, and output. But these models didn’t reflect reality. To account for the gulf between economic models and real world capitalism, economists had to add elements like capital accumulation (saving and investment) and business cycles (centered on money/credit systems, executive psychology, and uneven technological change). Yet the assumption that the price system was competitive didn’t change. 

In the 1930s, Joan Robinson and E.H. Chamberlain advanced their respective theories of ‘imperfect competition’ and ‘monopolistic competition.’ These were some of the first cracks in the assumption of competitive price theory. However, these new theories didn’t break through into mainstream economics. John Maynard Keynes published his General Theory of Employment, Interest, and Money, probably the most influential economics work of the first half of the 20th century, in 1936. In it, Keynes didn’t address these new theories regarding ‘less than competitive’ price systems, despite how his work explored new relevant assumptions at a macroeconomic level. 

B+S’s theory for why this divorce between micro and macro had not been theorized is because of the devastating consequences for capitalist economics, outlined in this book. Pre-eminent is the need to admit that capitalism is not the orderly, rational, efficient, dynamic system it is claimed to be. The inability to admit this is what led capitalist economics to function more as capitalist propaganda than concrete academic analysis of real world economic developments. B+S do note, however, influences on their work, including Kalecki and Steindal. These economists began the task of reconnecting micro and macro, furthering the concept of monopoly capitalism. 

Now we need to examine these ‘non-competitive’ monopoly pricing systems. What does it mean for giant corporations to be ‘price makers’ under monopoly capitalism? Functionally, it means that they can, and do, choose what prices to charge for their products. According to traditional monopoly theory (one seller of a commodity with no substitutes), a monopoly price is where additional revenue from selling an additional unit exactly equals the added cost to produce an additional unit. Up to this point, producing/selling each additional unit brings more revenue than cost (more profit); beyond this point, each additional unit brings more cost than revenue (less profit). 

Giant corporations of monopoly capitalism, however, aren’t this type of traditional monopoly. Rather, they are one of a small few companies, with easily substitutable products. This is known as an oligopoly. Even today, critics of monopoly capitalism note that every industry has several large players, rather than a single absolute monopoly. So let's see how an oligopoly, with several giant corporations dividing the market, can and does exhibit non-competitive monopoly pricing. 

How do these systems work in theory? If Corporation A lowers its price, there may be new demand at this lower price level. However, most new revenue for Corporation A comes from customers switching from Corporations B, C, and D, whose prices are now higher than A. This would ignite a classic ‘race to the bottom.’ Price competition would lead to price retaliation, lower prices, and a worse outcome for all four. So how do they avoid this? Lacking perfect knowledge of industry demand (which is impossible), all four firms make extremely careful estimates of the correct price. But inevitable price variation between the four firms would set up price retaliation, according to market logic. Such unstable markets were common in early capitalism, and still occur in new industries, but such volatility goes against the giant corporations’ orderly operations. 

So giant corporations have adapted their behaviour to align with capitalism’s evolution from competition to monopoly. Price cutting has become a foremost taboo, not (necessarily) as a conspiracy/cartel, but as an oligopolist survival mechanism. With price cutting functionally ‘banned,’ prices can remain high, maximizing the profits of the whole industry. These corporations still fight over the size of pie slices, but never jeopardize the pie’s overall size. “This is the decisive fact in determining the price policies and strategies of the typical large corporation,” and the decisive price theory for an economy dominated by the giant corporation. 

Group profit maximization has taken different concrete historical paths in each country, from explicit cartels to more discreet arrangements. Most common is ‘a kind of tacit collusion which reaches its most developed form in…"price leadership.”’ Price leadership involves the industry price being determined by adopting the price offered by one oligopolist, usually the biggest/most powerful. This strategy is adopted because the ‘less powerful’ oligopolists understand that this arrangement maximizes their profits. They would lose any price war to the industry leader. The 'price leader' can and often does change in ways both regular and arbitrary. But the results (tacit collusion) are essentially the same. 

An oligopolist initiating a price change may do so because it believes it is in the ‘collective’ capitalist best interest. Sometimes others agree and follow. Something the initiator must reverse their change. This 'reversal mechanism' is what differentiates tacit collusion from an out-and-out price war. It enables the price to be ‘a reasonable assumption of the theoretical monopoly price.’ In industries with one clear leader, price leadership takes a dictatorial form; in more balanced oligopolies, it takes a more ‘democratic’ form. 

Lowering prices can always induce a price war so its always avoided. On the other hand, the worst case scenario of raising a price is to have to lower it once the other oligopolists don’t follow. This makes the high prices of monopoly capitalism ‘sticky’; prices only ever really go up, almost never down. Price competition will still be pursued by a firm that believes it can benefit in the long term (ex. knocking a competitor/colluder out of business and reducing the ‘slices’). But once an industry stabilizes into this monopoly price structure, price competition ends. 

The struggle to gain larger markets continues, but prices become 'cooperative'. Other types of competition include those like the sales effort, covered in a following chapter. The competitive focus shifts from price to production costs, which also determine the overall surplus’ magnitude. Since 1) tacit collusion enables the oligopoly to approach the theoretical monopoly price and 2) giant corporations rigorously pursue cost reduction in every possible way, we see that 3) the tendency of the surplus is always to rise. 

We need to examine another key question: is there systemic pressure for oligopolies to cut production costs like under competitive capitalism? Corporations want to project an image of efficiency, but is it true? We need to bypass corporate self-promotion to find the economic behaviours stemming from the monopoly capitalist system. 

In any industry, the lowest-cost/highest-profit oligopolist has many advantages. They can invest more in research and sales, discount products, etc.. Other firms can’t undertake these without eating away at profit margins or provoking price competition. Seeking ‘most cost-effective’ status is reason alone for competition to drive down costs. This dynamic shows how, even in a market with colluding oligarchs, real pressure drives down costs, hence continually growing the surplus. 

In theory, this system of cost-minimization sounds great. In reality, the theoretical monopoly prices and profit maximization mean that the giant corporations absorb all cost savings for themselves. Cost reductions are never passed on to the consumer. So profit margins grow both absolutely and relatively, a bigger pie with bigger slices. Consumers see their wages eaten away by ‘sticky’ high prices. This ‘law of rising surplus’ seems to contradict Marx’s law of the tendency of the profit rate to fall. However, B+S claim not to be contradicting Marx’s dictum, crafted for competitive capitalism, but to be recognizing a real outcome in the structural realignment from competitive to monopoly capitalism.