Contestability

Question 1

Contestable Market

Answer 1

A market where there is freedom of entry to the industry and where costs of exit are low

Question 2

Are firms more likely to earn normal profit or abnormal profit?

Answer 2

Firms are more likely to earn normal profit because abnormal profit will attract hit and run competitors.

Short run - abnormal profit
Long run - normal profit

Question 3

Hit and Run Competition

Answer 3

When a firm enters a market quickly and leave when profits start to decrease

Question 4

Assumptions for a contestable market

Answer 4

Absence of Sunk Costs
Access to Technology
Low Customer Loyalty
Size of Barriers are low

One note - homo and heterogeneous goods are produced in contestable markets.