Measuring the Rate of Return for Competition Law

Abstract

This paper focuses on the application and interpretation of measures of rate of return for competition law. Amongst other results we analyse how outsourcing and similar arrangements impact on the rate of profitability and show that the measurement is more volatile the greater the rate of profit, suggesting that the measures are most problematic when they are most needed. We identify and interpret the outsourcing arrangements that provide the lowest rate of profit and show that these arrangements have a close relationship to net present value. Finally, we provide suggestions to make profitability measures more informative for competition law.

Keywords: internal rate of return, accounting rate of return, cost of capital, profitability measures, competition

JEL Classification: K21, L43, G38