Editing Perfect competition (section)

=== In competitive and contestable markets ===
[[File:Perfect competition in the short run (simple).svg|thumb|right|Only in the short run can a firm in a perfectly competitive market make an economic profit.]]
Economic profit does not occur in perfect competition in [[long run]] equilibrium; if it did, there would be an incentive for new firms to enter the industry, aided by a lack of [[barriers to entry]] until there was no longer any economic profit.<ref name="lipsey"/> As new firms enter the industry, they increase the supply of the product available in the market, and these new firms are forced to charge a lower price to entice consumers to buy the additional supply these new firms are supplying as the firms all compete for customers (See [[Monopoly profit|"Persistence" in the ''Monopoly Profit'' discussion]]).<ref name="Essentials">Chiller, 1991.</ref><ref name="MicroTheory">Mansfield, 1979.</ref><ref name="IntermediateMicro">LeRoy Miller, 1982.</ref><ref name="IndustrialOrg"/> Incumbent firms within the industry face losing their existing customers to the new firms entering the industry, and are therefore forced to lower their prices to match the lower prices set by the new firms. New firms will continue to enter the industry until the price of the product is lowered to the point that it is the same as the average cost of producing the product, and all of the economic profit disappears.<ref name="Essentials" /><ref name="MicroTheory" /> When this happens, economic agents outside of the industry find no advantage to forming new firms that enter into the industry, the supply of the product stops increasing, and the price charged for the product stabilizes, settling into an [[Economic equilibrium|equilibrium]].<ref name="Essentials" /><ref name="MicroTheory" /><ref name="IntermediateMicro" />

The same is likewise true of the [[long run]] equilibria of [[monopolistic competition|monopolistically competitive]] industries and, more generally, any market which is held to be [[contestable market|contestable]]. Normally, a firm that introduces a differentiated product can initially secure a ''temporary'' market power for a ''short while'' (See [[Monopoly profit|"Persistence" in ''Monopoly Profit'']]). At this stage, the initial price the consumer must pay for the product is high, and the demand for, as well as the [[Monopoly profit|availability of the product in the market]], will be limited. In the long run, however, when the profitability of the product is well established, and because there are few [[Monopoly profit|barriers to entry]],<ref name="Essentials" /><ref name="MicroTheory" /><ref name="IntermediateMicro" /> the number of firms that produce this product will increase until the available supply of the product eventually becomes relatively large, the price of the product shrinks down to the level of the average cost of producing the product. When this finally occurs, all [[monopoly profit]] associated with producing and selling the product disappears, and the initial monopoly turns into a competitive industry.<ref name="Essentials" /><ref name="MicroTheory" /><ref name="IntermediateMicro" /> In the case of contestable markets, the cycle is often ended with the departure of the former "hit and run" entrants to the market, returning the industry to its previous state, just with a lower price and no economic profit for the incumbent firms.

Profit can, however, occur in competitive and contestable markets in the short run, as firms jostle for market position. Once risk is accounted for, long-lasting economic profit in a competitive market is thus viewed as the result of constant cost-cutting and performance improvement ahead of industry competitors, allowing costs to be below the market-set price.