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Can Ex Post Rates of Return Detect Monopoly Profits?

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  • Boyle, Glenn
  • Guthrie, Graeme

Abstract

We review the ability of the ex post internal rate of return (IRR) to detect monopoly profits. When market values are used as entry and exit values the ex post IRR simply reveals whether the firm did better or worse than the market expected at the entry date. It says nothing about monopoly profits. When replacement costs are used as entry and exit values the ex post IRR can in principle reveal something about monopoly profits. However since the ex post IRR is a noisy measure of ex ante monopoly profits it will be very difficult to reject the hypothesis given the sample periods typically available. The benchmarks typically used are market-determined and therefore only comparable to IRRs calculated using market values - a situation when the ex post IRR reveals nothing about monopoly profits anyway. Furthermore there is ample empirical and theoretical evidence that these benchmarks do not even represent fair rates of return.

Suggested Citation

  • Boyle, Glenn & Guthrie, Graeme, 2002. "Can Ex Post Rates of Return Detect Monopoly Profits?," Working Paper Series 18991, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    • Handle: RePEc:vuw:vuwcsr:18991
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    Keywords

    rates of return; monopoly profits;

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