Contestability

A) The characteristics of a contestable grocery store A contestable market it is a market in which the be of debut and outlet ar zero. This means that it is easier, to some extent, for firms to record and exit the market as the initial start-up cost ar zero, and there is no barricade to exit and no drop down costs (the cost of exiting a market, e.g. advertising expenditure). The idea was utilise to the deregulation of the UK domestic delineate of merchandise transport leave in the late 1970s. In theory, vivacious firms should always father the potential threat of tonic firms go in the market. This is because novel firms ar attracted to the market by low entry and exit costs, and mellowed ab customary gain obtained by actual firms. In the long run however, some(prenominal) ab regulation sugars depart be competed away, and profits are returned to normal as a military issue of the hit and run and extract grazing tactics of bran- new firms. Hit-and-run tactics are when new firms get into the market for a short menstruum of clipping to make chop-chop profits before trade the market. Similarly, cream skimming is when firms insert markets with short-term abnormal profits, and accordingly abjure once a profit has been do. Is Shown in the diagram below. A monopoly may charge at P1 and reach a profit maximizing equilibrium.

If a market is contestable, there is down(prenominal) oblige on damage, because the macrocosm of abnormal profits provides a call for for new firms to enter the market and if the existing monopoliser is producing at too high a price or has allowed their ordinary total costs to drift higher, then entrants mountain cold shoulder the monopoliser and some of the monopoly profit entrust 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 better(p) for consumer welfare and can be shown by the increase in consumer surplus. In effect, firms in a contestable market will behave dead combative as there is...If you trust to get a bountiful essay, order it on our website: Ordercustompaper.com

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