What does the Principle of Competition state about excess profit?

The Principle of Competition indicates that when excess profits are available in a market, it can lead to an environment where numerous competitors are drawn to that market in pursuit of those profits. This influx of competitors can lead to fierce rivalry among them, often resulting in actions that may harm the overall financial health of the competitors involved. This situation is known as ruinous competition, where the attempt to capture profits drives prices down or leads to unsustainable practices, ultimately undermining the viability of many businesses.

In a competitive market, the natural drive for businesses to outperform each other can escalate to a point where companies sacrifice their margins, engage in destructive pricing strategies, or incur excessive expenses in attempts to maintain or grow their market share. Instead of benefiting all participants, this cycle can erode profits and potentially lead to business failures, highlighting the detrimental effects that excess competition can have when not managed correctly.