Abnormal profit

Ineconomics,abnormal profit,also calledexcess profit,supernormal profitorpure profit,is "profit of a firm over and above what provides its owners with a normal (market equilibrium) return to capital."Normal profit(return) in turn is defined asopportunity costof the owner's resources. A related broader term iseconomic rent,which applies to the owner of a resource, such asland,rather than to the firm as such.

According to the theoretical model ofperfect competition,abnormal profits are unsustainable because they stimulate new supply, which forces down prices and eliminates the abnormal profit. Abnormal profit persists in the long run inimperfectly competitivemarkets where firms successfully block the entry of new firms.Abnormal profit is usually generated by anoligopolyor amonopoly;however, firms often try to hide this fact, both from the market and government, in order to reduce the chance of competition, orgovernment interventionin the form of anantitrustinvestigation.

In principle, there are three kinds of abnormal profit:

• Monopoly profit
• Resource rent
• Intramarginal rent.

Business writerMichael Porterand Anita M. McGahan undertook an empirical study of the "emergence and sustainability of abnormal profits" in 2003, in which they concluded that both industry structure and firm performance were determinants of whether abnormal profits could be sustained by firms.

See also

• Economic rent
• War profiteering
• Windfall profits
• Excess profits tax