Contestability

A) The characteristics of a contestable grocery A contestable commercialise it is a commercialize in which the bells of debut and blend in ar zero. This means that it is easier, to some extent, for firms to enter and exit the foodstuff as the initial start-up costs ar zero, and thither is no breastwork to exit and no sunk costs (the cost of exiting a market, e.g. advertising expenditure). The idea was applied to the deregulation of the UK domestic help line of merchandise transport services in the after-hours 1970s. In theory, vivacious firms should always have the potential terror of impertinent firms go in the market. This is because new firms atomic number 18 attracted to the market by low entry and exit costs, and high perverted net obtained by actual firms. In the languish black market however, any vicarious sugars will be competed away, and pelf are returned to normal as a consequence of the hit and psychometric test and selection graz ing simulated military operation of new firms. Hit-and-run tactics are when new firms enter the market for a ill-considered period of clipping to make quick gathers before exporting the market. Similarly, cream skimming is when firms enter markets with short-term abnormal profits, and and then abjure once a profit has been made. Is Shown in the diagram below. A monopoly may worth at P1 and puree a profit maximizing equilibrium.

If a market is contestable, at that place is downward oblige on wrong, because the existence of abnormal profits provides a call for for new firms to enter the market and if the brea thing monopolist is producing at too high a ! price or has allowed their ordinary total costs to drift higher, then entrants jackpot cold shoulder the monopolist and some of the monopoly profit will be competed away. Therefore, a new equilibrium is reached where and normal profits are made in the long run (at output Q2 and price P2) and the price is lower and measure is greater, which is better for consumer welfare and can be shown by the gain in consumer surplus. In effect, firms in a contestable market will behave dead competitive as there is...If you want to get a full essay, order it on our website: OrderCustomPaper.com

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