On the Misuse of Accounting Rates of Return to Infer Monopoly Profits

Accounting rates of return are frequently used as indices of monopoly power and market performance by economists and lawyers.' Such a procedure is valid only to the extent that profits are indeed monopoly profits, accounting profits are in fact economic profits, and the accounting rate of return equals the economic rate of return. The large volume of research investigating the profits-concentration relationship uniformly relies on accounting rates of return, such as the ratio of reported profits to total assets or to stockholders' equity as the measure of profitability to be related to concentration.2 Many users of accounting rates of return seem well aware that profits as reported by accountants may not be…