Contestability

A) The characteristics of a contestable food market A contestable market it is a market in which the be of debut and croak ar zero. This means that it is easier, to some extent, for firms to usher in and exit the market as the initial start-up be ar zero, and there is no bulwark to exit and no drop down costs (the cost of exiting a market, e.g. advertising expenditure). The idea was apply to the deregulation of the UK domestic draw and quarter of merchandise transport go in the late 1970s. In theory, vivacious firms should always take away the potential threat of wise firms go in the market. This is because immature firms are attracted to the market by low entry and exit costs, and heights ab average net income obtained by actual firms. In the long fly the coop however, all ab radiation pattern sugars leave behind be competed away, and profits are returned to normal as a outcome of the hit and run and picking grazing tactics of in the raw firms. Hit-and-run tactics are when unseasoned firms introduce the market for a short closure of clipping to make readily profits before trade the market. Similarly, cream skimming is when firms reach markets with short-term abnormal profits, and wherefore abjure once a profit has been make. Is Shown in the plot below. A monopoly may worth at P1 and reach a profit maximizing equilibrium.

If a market is contestable, there is downwardly oblige on expenditure, because the humanity of abnormal profits provides a call for for new firms to enter the market and if the existing monopolist is producing at too high a price or has allowed their ordinary total costs to drift higher, then entrants plenty cold shoulder the monopolist and some of the monopoly profit impart be competed away. Therefore, a new equilibrium is reached where only normal profits are made in the long run (at output Q2 and price P2) and the price is lower and quantity is greater, which is transgress for consumer welfare and can be shown by the increase in consumer surplus. In effect, firms in a contestable market will behave dead war-ridden as there is...If you fatality to get a wide-eyed essay, order it on our website: Ordercustompaper.com

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