Theme 3: Contestability Flashcards
What is hit and run competition?
In a contestable market where there are low barriers to entry and exit. If the firms are making supernormal profits, new firms will enter, undercut the incumbent firms and then leave when there are no more supernormal profits.
Why can firms in a contestable market only make normal profits in the long run?
As the market is contestable firms will join if they ever see supernormal profits. If price is AR>AC.
What is competition?
Number of firms competing in a market
When is there high competition?
When there are lots of firms
When is there low competition?
When there are a few firms
What is a contestable market?
Low barriers to entry and exit but its not relevant how many suppliers there are.
Give 3 reasons why a market might not be contestable?
- Huge economies of scale
- High sunk costs
- Brand loyalty
