Th3.4: Characteristics of Contestable Markets Flashcards
1
Q
What is there within a contestable market?
A
there is perfect knowledge so if one firm is making abnormal profits, other firms will enter the market
2
Q
There is freedom of entry and exit meaning…
A
any firms can enter/leave the market - there will also be a relative absence of sunk costs
3
Q
Firms will be able to and have the legal right to use the best available technology, meaning…
A
their average cost curve will be the same as the original firms
4
Q
There will be a low product loyalty, meaning…
A
people don’t consistently use one brand and are happy to switch if a new one enters the market
5
Q
What do we assume about firms?
A
they are short run profit maximisers and do not collude with each other
