Profitability Measures and Competition Law

Economists and antitrust authorities recognize that firms with market power often raise prices above competitive levels and thus earn monopolistic profits that exceed the competitive cost of capital. In both the U.S. and Europe, this recognition has led antitrust authorities (and courts) to consider profitability evidence when determining whether a firm has market power. In Europe, unlike the U.S., profitability data has sometimes been used to demonstrate that a firm has “abused” its market power by charging too high a price. This chapter outlines various measures of profitability and considers what role they can play in competition law. We argue that by using appropriate definitions of asset value it is possible to identify whether a firm earns more than the absolute minimum needed to cover cost and compensate for risk, i.e., whether profitability measures such as the internal rate of return and the accounting rate of return are above the competitive cost of capital. However, we also show that it can be quite difficult to obtain accurate measures of profitability, making it hard to assess the quantity of the “excessive” return. Despite such problems, we argue that the measurement of profit has a role to play in competition law but that the analysis is far more of an art form and far less of a simple benchmark comparison.