Contestability

A) The characteristics of a contestable grocery A contestable commercialise it is a food mart in which the addresss of debut and effect ar zero. This means that it is easier, to some extent, for firms to enter and exit the market as the initial start-up costs ar zero, and in that respect 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 national line of merchandise transport services in the youthful 1970s. In theory, vivacious firms should always have the potential threat 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 brachydactylous net obtained by actual firms. In the capacious locomote however, any vicarious sugars will be competed away, and benefit are returned to normal as a consequence of the hit and feast and selection grazing tactical manoeuvre of new firms. Hit-and-run tactics are when new firms enter the market for a minuscule period of clipping to make quick receiptss onwards 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 come to a profit maximizing equilibrium.

If a market is contestable, there is downward oblige on cost, because the existence of abnormal profits provides a call for for new firms to enter the market and if the brisk monopolist is producing at too high a price o r 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 alone normal profits are made in the long run (at output Q2 and price P2) and the price is lower and amount is greater, which is better for consumer welfare and can be shown by the sum up 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: BestEssayCheap.com

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