Near the checkout stand, grocery stores and convenience stores prominently display low-price impulse items like candy, gum and soda that customers crave. Despite low prices, such products generate enviable profit margins for retailers and for the companies that produce them. For example, Hershey Foods Corp. is the largest U.S. producer of chocolate and nonchocolate confectionary (sugared) products. Major brands include Hershey’s, Reese’s, Kit Kat, Almond Joy, and Milk Duds. While Hershey’s faces increasing competition from other candy companies and snack-food producers of energy bars, the company is extremely profitable. Hershey’s rate of return on stockholder’s equity, or net income divided by book value per share, routinely exceeds 30% per year, or about three times the publicly-traded company average. Profit margins, or net income per dollar of sales revenue, generally exceed 13%, and earnings grow in a predictable fashion by more than 10 percent per year.
A. Explain how the failure to reflect intangible assets, like the value of brand names, might cause Hershey’s accounting profits to overstate Hershey’s economic profits.
B. Explain why high economic profit rates are a necessary but not sufficient condition for the presence of monopoly profits.