Contestable Markets

• Characteristics of a contestable market:

  • Many firms
  • Differentiated goods - PM
  • Low barriers to entry/exit
  • Non price competition
  • static efficient
• Hit and run competition - where firms will join in the short term and earn SN profits, due to the low barriers to entry, then leave in the long run after all SN profits are made
• Benefits:

  • Low prices
  • Allocative efficient
  • Incentive for X-efficiency