Static profitability as a measure of deviations from the competitive norm

Recently, several industrial-organization economists have claimed that the rate of return on sales (II/S) is superior to the rate or return on assets (II/K) as a measure of monopoly power. This paper argues that there is no reason to prefer one index over the other. To make the point, an oligopoly model of optimizing agents is derived that yields II/K as a performance measure. The derivation leads to natural interpretations of the two indices and therefore to clarification of the circumstances under which each might be preferred.