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A competitor will be highly motivated to raise money at less than 20% cost of capital, build a duplicate factory, and undercut the first factory: they'll still make an above-average return.
This keeps going until it is no longer profitable for a new competitor to enter the fray, which is the point that the return on capital for the next would-be competitor is equal to the cost of capital for them all.
(axiomatically, the global average return on capital is equal to the global average cost of capital)'
Mungo,
This will appear to be nitpicking, but it really is just that I want to make sure I am understanding the important point that you are making - do you really mean axiomatically? Or could it be that you mean 'as a result of this process (i.e., the pursuit by competitors of returns on new capital in this industry, as long as they are higher than the cost of capital.)'
TIA, DTB
