Contestable markets Flashcards
What is a contestable market
Low barriers to entry/exit, so threat of competition is high
Assumption for constesable markets
Normal profit in long run
Hit and run competition
If a firm is making SNP in short run, new entrants will enter and undercut as low barriers to entry. Price falls until =AC and then firms ‘run’ with low barriers to exit.
How technology has increased contestability
Lowered barriers e.g online, reduced start up costs
More entrants
Information e.g find out costs and revenues
Contestability diagram
Normal cost/rev diagram, moves closer to sales max (limit price) to reduce threat
Pros cons of contestable markets (3,2)
More A.E
More P.E
X-efficient
Lack of D.E EVAL:new firms entering with new ideas can be D.E
Could lead to cost cutting in dangerous areas e.g health safety