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How Strong Is Your Firm’s Competitive Advantage? by Daniel Marburger

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Chapter 4

We Could Make More Money If Our Competitors Would Just Go Away

Eroding Profits in the Long Run

A second constraint on a firm’s long-term profitability is the threat of new entrants. Earlier, we discussed the economics underlying the firm’s profit-maximizing price and quantity. We also distinguished between accounting profits (the difference between revenues and costs) and economic profits (the difference between accounting profits and foregone profit opportunities). In this chapter, we will re-visit these concepts and show the impact of market entry.

A firm has an economic profit if its accounting profit exceeds any of its income-generating alternatives. Let’s create an example. Teddy attended culinary school in Missouri. While studying, ...

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