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If everyone can do it, its difficult to create and capture value from it.
If everyone can do it, its difficult to create and capture value from it.
or, alternatively
def. economic profits (rents) are returns in excess of what an investor expects to earn from investments of similar risk (i.e., in excess of the opportunity cost of capital)
IBM $6,328 $2,541
Microsoft
$4,490 $3,776
$(5,525)
General Motors
$2,956
All data in US $ millions from 1998. Abstracted from S. Oster, Modern Competitive Analysis. Oxford University Press. 1999.
Accounting Profits
Economic Profits
Tobins Q
Ratio of a firms market value to its asset replacement value Directly measures rents above those to physical inputs Difficult to calculate because it requires knowledge of assets
replacement value
The existence of economic profits suggests some type of market inefficiency. The strategists task is to identify ways in which firms may capitalize on these market imperfections.
An Industry S1
An Industry S1 P1 D Q1
An Industry S1 P1 D Q1 P1
A Firm MC AC
10
An Industry S1 P1 D Q1 P1
A Firm MC AC
q1
11
An Industry S1 P1 D Q1 P1
A Firm MC AC
13
An Industry S1 P1 D Q1 P1
A Firm MC AC
q1
14
An Industry S1 P1 D Q1 P1
A Firm MC AC
q1
15
An Industry S1 P1 D Q1 P1
A Firm MC AC
q1
16
An Industry S1 P1 P2 D Q1 Q2 S2 P1
A Firm MC AC
q1
17
An Industry S1 P1 P2 D Q1 Q2 S2 P1 P2
A Firm MC AC
q2 q1
18
An Industry S1 P1 P2 D Q1 Q2
ar s t i f o r c p i m o n y! o a Ec w a d e compet e
A Firm MC P1 P2 q2 q1 AC
S2
19
The existence of economic profits suggests some type of market inefficiency. The strategists task is to identify ways in which firms may capitalize on these market imperfections.
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Facts:
Average industry returns vary even after controlling for risk. Returns among companies within industries vary even more. Returns for individual companies vary over time.
Density
Returns
21
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Monopoly Rents
Ricardian Rents
Schumpeterian Rents
(Dynamic Capabilities View)
S MC 1MC 2 P S P AC 1 q1 q2 AC 2
D Q
Monopoly Rents
S P S
D Q
AC 2
AC 1 q1 q2
The Fundamental Principle -- In perfectly competitive markets, no firm realizes economic profits. Economic profits are returns in excess of the opportunity cost of capital. In the real world, product markets are rarely perfect and firms often have competitive advantage. Broadly speaking, firms may capture economic profits when there are either barriers to competition or barriers to imitation.
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