Why do some empirical studies use profit as a measure of monopoly power?
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Why do some empirical studies use profit as a measure of “monopoly power”?
Started by Murphy, Sep 07 2005 08:14 PM
2 replies to this topic
#2
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Posted 29 July 2008 - 11:55 AM
Empirical studies use profit as a measure of the monopoly power because if the so-called competitive market profit in the LR should be in equilibrium and is so dispersed as to disappear among the many producers and if profit is in the hands of one or a few, they must be cheating somehow. The problem with that is that if long-term studies are done profit isn't static. Even the evil Standard Oil fell in a new market; there is no real LR in an equilibrium competitive market. Competition is gains and losses from entrepreneurial experiments: this worked, this failed. Also, what again is the market price from which profits are measured? If the competitive price is A, and the monopoly price is B, where did we get that A in the first place??? What about tariffs, subsidies, regulations have they been added and subtracted from the "market" price?
#3
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Posted 20 September 2008 - 10:38 PM
Mart Grams, on Jul 29 2008, 11:55 AM, said:
Also, what again is the market price from which profits are measured? If the competitive price is A, and the monopoly price is B, where did we get that A in the first place???
You're right in the grand scheme. In practice, I think they look to see what the reported earnings are, and if they are a higher return on investment than in other "comparable" firms, then the firm in question is thought to be earning above-normal profits. So it might have "market power."
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