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Difference Between Profit And Accounting Profit

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A firm’s profitability is considered to not always be a good indicator of a dominant position. A firm’s profitability represents its aptitude to gain profit. The level of a firm’s profit can be a sign of dominance, but it is debatable if a decision regarding market power should be based only on the value of profit. Making profits is the goal of a company and it can be achieved through efficient behavior. Punishing a firm for being efficient may harm in the end the consumers. Nevertheless, the difference between economic profit and accounting profit is important to explain when determining if market power exists. While economic profit can be a warning of dominance, it is less probable for accounting profit to lead to market power. Besides profit,…show more content…
A firm can make profits if it is acting efficient on the market and it manages its costs better than its competitors. Levy et al (1997) consider that the profits influence the firm’s decisions regarding output, workers and investment. “Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run.” (Hofstrand, 2009) When discussing profits and market power, a distinction between accounting profits and economic profits has to be…show more content…
There is no doubt that profitability can be an indicator of market power, but it is important to not base the decision of market power only on this aspect. As explained, the profit can also be a sign of efficiency and high profits can be achieved in competitive markets through legit actions. Profits are an incentive for firms to innovate and expand. If the profit becomes directly associated with market power, the companies may stop to invest in innovation that could lead to lower production costs. Nevertheless, small companies may not be interested anymore to expand and will try to keep their profits at a certain level that would not make them dominant. On a long term, these aspects are harmful for the consumer. Profits should be seen as an indicator for market power as long as there are more factors
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