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Assessing an industry

In a perfectly competitive industry structure, where outside firms can enter the industry at will, companies can only achieve a ‘normal’ rate of return. That is, shareholders receive a rate of return that only just induces them to put money into the firm and hold it there.

The rate of return cannot rise above the normal level to give a supernormal return. Imagine if a perfectly competitive industry did give a very high rate of return temporarily because of, say, a rise in the price of the product. New entrants to the industry, or additional investment by existing competitors, would quickly result in any supernormal return being competed away to take the industry back to the point where the return available is merely that ...