Effects Of Abnormal Profits On The Long Run Essay

1530 Words7 Pages
2. Abnormal Profits in the Long Run

Normal Profit occurs when the average revenue is equal to the average total cost. Abnormal profit is therefore defined as extra profit above normal profit. In the long run, oligopolies make abnormal profits, due to the assumption of high barriers to entry. When firms in an industry seem to be making abnormal profit, it may attract new entrants into the market; causing an increase in supply and therefore a decrease in price leading to normal profits. However since there are high barriers to entry in an oligopolistic market, an influx of new firms into the market is highly unlikely, therefore abnormal profits are sustained in the long run.

Diagram 2.0

3. Non-Price Competition

As previously discussed, price stickiness is one of the implications under the assumptions of the oligopoly model. Since changing price will generally result in the loss of profits and market share; firms compete using non-price related strategies. One of these methods includes product improvement. If firms improve the quality of the product or implement characteristics that their targeted demographic enjoy, they can charge more for the product or attract a greater consumer base. Firms operating in an oligopolistic firm also invest largely in marketing of their product. Raising awareness regarding the product will encourage more sales if advertisements appeal to audience. Branding and consumer loyalty is an artificial barrier to entry and a
Get Access