The problems discussed so far concentrate on the practical aspects of calculating profit
rates. They are important when empirical studies use published (accounting) profit figures
to test economic theories about relationships between structural and conduct factors
and profitability. Added to these practical problems, there are also significant theoretical
problems in using profitability as a measure of performance. It is possible that high profits
might not be the result of efficiency in production, but the opposite – high profits
could be due to the existence and the abuse of monopoly power. Conversely, low profitability
might not be due to poor performance if the firm’s objective is sales or growth
maximisation. In this case the firm will be attempting to satisfice rather than maximise
profits and therefore its performance should not be judged on the basis of its profit levels.
Clearly more than one indicator should be used to measure performance but, as will be
seen later,many of these suffer from similar theoretical and empirical problems.