Competence Explanations of Economic Profits in Strategic Management: Some Policy Implications

Economics offers at least two classes of explanations of the existence of economic profits (Demsetz 1973). The first, which can be described as a monopoly theory of economic profits, suggests that economic profits emerge as a result of firms acting to reduce output below and increase prices above the competitive level. Several large theoretical and empirical literatures on topics such as tacit and explicit collusion, industry concentration, oligopolies, and vertical and horizontal exclusive agreements (to name just a few) all fall within this broad category of monopolistic theories of economic profit (Scherer 1980).