Conestable markets

• Contestability?


  the degree to which a market has the potential for new firms to enter

  Perfect contestable- no barriers to entry and exit

  Not contestable- perfect barriers to entry and exit
• contestable market characteristics?


  Freedom of entry/ exit

  A pool of potential entrants

  'Hit and run' entry eg xmas retailers

  perfect knowledge of the industry

  Goods may be homogenous or differentiated

  no restriction on the number of firms
• How can monopolies be productive and allocative efficient?

  If they charge high prices, potential competition will enter and undercut the price. So the monopolist sets a price to make normal profits only

  If they act inefficiently where AC is not minimised, potential competition will produce more efficiently and charge a lower price, so they become productively efficient

  AC=AR=P=MC=AC