Contestability

3 flashcards · Economics · by Addaneye

1. What is a contestable market?

   A market with lower barriers to entry and exit

2. What is hit and run competition?

   In the short run, supernormal profits can be made but since there are low barriers to entry and exit, new firms will join, undercutting incumbent firms. They will keep undercutting each other until P=AC at which point only normal profits can be made and the new firms will leave the market

3. How can firms avoid hit and run competition?

   Setting P=AC