The Bottom Line on the Persistence of Profits
1 July 2004
By Dr. Steven Schwartz
Do firms with high profits have market power? This question and the issues it raises are at the heart of one of the longest-running debates in economics. And the debate is not merely an academic one. Heated exchanges on the issue can be heard in courtrooms around the country and in one antitrust trial after another. A naïve view of the world may lead one to believe that all firms that report high profits must have market power. However, an economist would want to dig a little deeper and to question the wisdom of that view. Are the accounting profits that firms report the most useful profits for an investigation into market power? Are they useful at all to evaluate allegations of anticompetitive business practices and firm conduct?
In this chapter from Economics of Antitrust: New Issues, Questions, and Insights, NERA Senior Vice President Dr. Steven Schwartz tackles this issue and raises the stakes: what can we infer from profit margins that are high and persistent? As Dr. Schwartz explains, accounting profits do not tell the whole story. And even when using an economic measure of profits, one must exercise care because economic profits can persist in markets that are characterized by vigorous competition and low barriers to entry.
