High, in effect, is defined in this proposition in either of two ways. Most commonly, it has been taken to mean: high enough to warrant remedial intervention of some sort by the state.4 Recently, however, a growing minority of economists has urged that it be taken to mean instead: high enough to warrant intervention, provided the state can show that rates of return in excess of R1 reflect collusive behavior by the leading firms and not cost advantages which these firms have over their leading rivals.' Both meanings in turn reflect a third: high enough to imply a typical market price closer to PM in Figure lb than to Pc' where PM is the price that would prevail if the leading firms maximized collective, current-period profits and Pc is the price that would prevail if collective, current-period profits approximated zero.6 Proposition 1 rests on a large body of empirical work. Proposition 2, however, does not; nor does it rest on any theoretical analysis. Industrial economists simply have intuited that there is a correspondence between the R1R2 segment in Figure la and the PMP* segment in Figure lb. Are there substantive grounds for the intuition? I argue that there are not. The rates of return that lie along the R1R2 segment are competitive,

William W. Alberts, Gailen L. Hite, The Modigliani-Miller Leverage Equation Considered in a Product Market Context, The Journal of Financial and Quantitative Analysis, Vol. 18, No. 4 (Dec., 1983), pp. 425-437

The objective of this paper is to carry out tests of the general hypothesis, most recently urged by Scherer [14, pp. 100–102] and Weston and Brigham [17, p. 689], that the cost-of-equity capital of small industrial corporations is greater than that of large industrial corporations. The paper denotes this cost as ke and defines it as the expected rate of return on the stock of a company when the current price of the stock is in equilibrium. A common designation of ke of course is the equity capitalization rate. It will be noted that this definition of the cost-of-equity capital abstracts from the flotation costs that are usually incurred when companies sell new stock. Archer and Faerber [2] have already shown that these costs are inversely related to the size of companies.