On the Misuse of the Profits-Sales Ratio to Infer Monopoly Power
Volume: Volume 18, No. 3
Issue: Autumn 1987
Pages: pp. 384-396
Authors: Franklin M. Fisher
Title: On the Misuse of the Profits-Sales Ratio to Infer Monopoly Power
Abstract: The common use of the profits-sales ratio as a measure of the Lerner index of monopoly power is flawed, even with the assumption of constant returns, because of problems connected with the valuation of capital. The size of the error is related to the cost of capital, the growth rate of the firm, the depreciation method used, and, most important, the shape of the stream of benefits resulting from an investment. Examples show that the error can be quite large; further, the error is likely to be systematically related to the variables used in regression studies.
JEL Classification
Market Structure: Industrial Organization and Corporate Strategy (6110)