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Two Paradoxes in the Theory of Capital Investment and Competition

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  • Scherer, F. M.

    (Harvard University)

Abstract

This paper considers two paradoxes concerning the relationship between capital investment decisions and competition. First, conventional capital budgeting methods imply that substantial infra-marginal surpluses are attained above the cost of capital, but this is inconsistent with the premise that returns on capital equal the cost of capital in competitive markets. Second, contrasts in the pharmaceutical industry between high reported returns on capital invested, the accounting treatment of research and development outlays, and inter-firm competition in research and development are explored.

Suggested Citation

  • Scherer, F. M., 2013. "Two Paradoxes in the Theory of Capital Investment and Competition," Working Paper Series rwp13-030, Harvard University, John F. Kennedy School of Government.
    • Handle: RePEc:ecl:harjfk:rwp13-030
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