Contestable Markets

Contestable Markets

1. The potential ease or difficulty with which new firms may enter the market

2. The absence of barriers to entry and exit creates potential for new firms to enter and contest the market

3. Actual contest in the market is NOT essential

4. The threat of entry (according to contestable market theory) ensures efficient and non-exploitative behaviour by existing firms

5. Must be LOW barriers to entry

6. if entry is easy then oligopolies and monopolies may become efficient

7. no competitive disadvantage compared with the INCUMBENT FIRMS(those firms already in a market)

   • Must have Access to same technology
   • MUST be no no brand loyalty
   • Must be no significant learning- by-doing effects

8. prevent monopoly behaviour

9. HIT AND RUN - involves firms entering the market for a short period of time, making a profit, and then leaving the market if existing firms begin to respond in an aggressive fashion

10. monopolies charge the profit max price but in contestable market they are vulnerable to hit and run and taking advantage of the abnormal profits . To avoid this monopolies set P=ATC so there are no abnormal profits to at as an incentive

11. Ensure firms a efficient so consumers benefit by being BOTH productively and allocatively efficient