Y2 26) Contestable Markets

Y2 26) Contestable Markets. Full detail and theory of contestable markets
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Great video! The threat of entry *cackles*

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[@68007426]

Thank you so much, this has been very helpful! I am looking for the original source to cite, I believe the first origin source of this theory was from a textbook (based on my limited search), would you please be able to provide the origin of this theory? Thanks!

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common sense...

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[@jasonho9724]

Surely dynamic efficiency can coexist with contestability, as being contestable doesn’t mean sizes go smaller. Correct me if I’m wrong

[@bigmanting4041]

AFAIK Firms don't get LR SNP which is necessary

[@anonymousaccount5835]

Well kind of. Normally, in a contestable market the significant threat of entry of new firms into the market (ie- hit and run competition) acts as an incentive for firms in a contestable market to keep prices as low as possible (entry limit pricing). Supernormal profit can STILL be made however due to economies of scale still being exploited, and costs being cut, but NOT the the same extent as a pure monopoly or oligopoly.

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[@user-eh4fs2gg9x]

Can I kindly know the book from where we can read this concept?

[@supertrainmaniac]

Hi, was wondering how you could evaluate the allocative efficiency point?

[@chalesbergca3754]

I'd use the contestability over time evaluation point. Firms gaining patents or using anti-competitive strategies reduces contestability in the market, meaning they can return to MC=MR, which isn't allocatively efficient.

[@supertrainmaniac]

@@chalesbergca3754 thanks a lot

[@nathanward4325]

Is normal profit not where mc = mr and there is no gap between ar and ac when a line is drawn vertically upwards? Or is it different in a contestable market

[@bertiecooper6698]

The diagram is drawn on the basis that it is a monopoly, therefore it aims to operate at mc = mr the profit maximising equilibrium, however because there is a threat of competition the monopolist can change their price because they have price making power to the limit price where AR = AC and therefore making normal profits. Your thinking of normal profits in a monopolistically competitive market where new firms actually enter, its not just a threat they actually enter and reduce market share, hence why the individual firms ar curve shifts so the normal profits are made at their profit maximising output where MC = MR.

[@nathanward4325]

Bertie Cooper ahh okay thank you 👍

[@TheGamingWattsit]

How does lowering price and increasing quantity prepare the firm if the threat becomes real?

[@lewisroxar3948]

because it makes it harder for new firms to survive when they have to charge low prices and haven't yet benefitted from economies of scale in order to reduce their costs.

[@willdavies969]

how is monopolistic competition and contestable markets different?

[@tamertayyareci1333]

Because in monopolistic competition their behaviour isn't based off of other firms they still produce at mc=mr. In a contestable marker they are scared of new entrants so enact in limit pricing e.g. sales max where ac=ar

[@willdavies969]

So are in both markets, are firms price makers then?

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Yeah they will be

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si tyhis the onlydiagram - about contestabel martkets.

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