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What is a contestable market in economics

what is a contestable market in economics

With a perfectly inelastic supply, the supply curve would be a vertical line, parallel to the y-axis, that has only one value.
Hence if there are sunk costs present in the market it impedes the first assumption of no exit barriers.
The Journal of Political apple educator discount canada Economy,.For this, the entrant needs to buy new machinery.Because of this, even a single-firm market can show highly competitive behavior.Learn more about Business Resources, sources.I am more skeptical about their conclusions that occasionally it is good public policy to restrict entry and competition." References William.5, more generally, experimental evidence collected since the publication of Baumol's paper has suggested that perfectly competitive markets would - if they existed - behave in the way Baumol outlined, the performance of imperfectly contestable markets (i.e.Essentials of Economics, John Sloman (third edition) isbn Brock, 1983.However, if the new firm cannot use or transfer the new machines that he bought for the production of steel to other uses in another industry, then these fixed costs on machinery become sunk costs.Baumol, holds that there exist markets served by a small number of firms, which are nevertheless characterized by competitive equilibria (and therefore desirable welfare outcomes ) because of the existence of potential short-term entrants.The theory of contestable markets has been used to argue for weaker application of antitrust laws, as simply observing a monopoly market may not prove that a firm is exploiting its market power to control the price level.Sunk costs are those costs that cannot be recovered after a firm shuts down.When the original incumbent firm(s) respond by returning prices to levels consistent with normal profits, the new firms will exit.In this scenario, the merchant is compelled to sell these manuscripts, regardless of demand or price considerations, because failing to do so would only lead to larger losses.1, however, it is now generally admitted that Baumol's judgment that the US airline industry was therefore best left deregulated was incorrect, since the now duly deregulated industry is "well on its way" to evolving into a concentrated oligopoly.Hence this market will not be contestable and no firms would enter the steel industry.Full Answer, on a traditional supply and demand curve, the supply curve is represented by a line that goes from right to left and intersects with a demand curve at an equilibrium point." Contestable Markets and the Theory of Industry Structure: A Review Article ".
1, contestable markets are characterized by "hit and run" competition; if a firm in a contestable market raises its prices much beyond the average price level of the market, and thus begins to earn excess profits, potential rivals will enter the market, hoping to exploit.


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