The common pool of transitional profits
Randall G. Holcombe
Published online: 25 July 2013
Springer Science+Business Media New York 2013
Abstract Transitional profits are above-normal profits that can be earned by firms as
a result of changes in market conditions or entrepreneurial innovations of the firm.
They are a common pool and are competed away by firms that enter profitable
markets or imitate the innovations of profitable firms. The economics literature
provides two conflicting views on transitional profits. One is that above-normal profit
is a sign of economic inefficiency and is the result of either monopoly power or
disequilibrium. The other is that economic profit is necessary for economic efficiency
because profit is the lure that pushes entrepreneurs to allocate resources more
efficiently. Both views are considered, along with an analysis of whether this
common pool resource is competed away too rapidly, as the theory of common pool
resources would suggest.
Common pool resource
Changes in market conditions, or innovative activities of firms, can result in firms
earning above-normal profits for a period of time. Those profits provide an incentive
for other firms to enter that market, or for existing firms to expand their activities in
the profitable market to try to capture some of that economic profit. The resulting
entry into that profitable market competes those above-normal profits away. Those
temporary above-normal profits that are competed away by entry are transitional
profits. They are a common pool because, like fish in the ocean or grass in a common
grazing ground, the existence of those transitional profits entices firms to enter that
Rev Austrian Econ (2014) 27:387–401
The idea for this paper originated from conversations the author had with Richard Higgins in the late 1970s.
The author gratefully acknowledges helpful comments from a referee, and the audiences when the paper
was presented to the Society for the Development of Austrian Economics in November 2012 and the
Austrian Economics Research Conference in 2013. Any shortcomings of the paper are the author’s
responsibility, unless, perhaps, Richard Higgins is partly to blame.
R. G. Holcombe (*)
Department of Economics, Florida State University, Tallahassee, FL 32306, USA