Any economist care to chime in?
It's a common claim on HN that when a regulator caps profit margins, that incentivizes the entity to make-work to increase absolute revenue and thus profits. But capital markets, i.e. investors, only care about marginal returns. Unless your profit margin cap is really high relative to average returns in the global market, there's no market pressure to do this, AFAICT. Capital projects require investment, but what investors have so much money burning holes in their pockets that they're eager to invest at marginal rates lower than what they could invest elsewhere?
The only financial incentive for this would have to come internally from the company, say from executives whose compensation would increase merely by dint of larger absolute revenues. For regulated entities maybe that's plausible? But typically executive compensation is usually tied to margins and given in stock.
I only just came to this realization when reading about the effect of tariffs and a description of why they drive up prices much more than you think. If the import price on a widget is $100, a 10% tariff drives it up to $110. If the next purchaser in the supply chain was originally paying $X, you might think they would just pay $X + $10, and on down the chain, so that retail prices only rise by $10. But that's not how it works. If the importer was adding 20% (not atypical), they're going to need to sell the widget at $120 + $10 + ($10 * 20%), so $132.00. The next purchaser will need to do the same, but on their purchase price. Whereas before they were selling at $120 + ($120 * 0.20) = 144.00, now they need to sell at $132 + ($132 * 0.20) = $158.40, an $18 jump, not $10. It compounds on down the chain. Why? Your investors are expecting you to add a Y% margin. The reality is a little more complex, of course. Maybe a supplier can get by with a smaller profit margin, but the floor is going to be their cost of capital for buying supply, which may be least 5-10%.
