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Essay plan contestable markets
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Evaluate contestable markets
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Evaluate, usingappropriate diagrams, advantagesand disadvantages, of a contestable market.lower
prices Higher Prices (advertising:barrier exit (
·
sunk
of
· =
20A
"Her tobeing
proderrelyettet dyamically (normal
en
Not efficient
·
profit (
of (potential
·
Behaviour unchanged
>
monopoly actual
comp
compl
·
X-efficient ·
merge/collude/takeover
-
exploitation
·Dynamically doesn'taside
efficient by regulation low
quality/unrate
· -
product
·to cyclic unemployment (*DDL)
↑
Figure 1:
MC
- &
Al
i
AR D =
A
Mich
the contestable
theory of markets suggests thatpotential competition, notactual competition,
determineshow firmsbehave and how
they
efficient are. The cornerstone of the
theory of
contestable markets thatthere reduced barriersto and exit.
is are
entry
One advantage of a contestable marketi spricewill be lower than in a monopoly. This
can be
Thisisasin AC:
seen in figure 1. a contestable market, firmsoperate at AR, which isnormal
profit.
Thisi sto deincentivise outside firms entering
from the market,and they don'twantthere to
be hit and run don'twantother steal and
competition;they firms to their market share
be
create
volatility. If there is no supernormal profitbeing made in the market, outside firms will
indifferentfrom enteringthe Therefore, a contestable marketoperating AC
at AR,
=
market.
that consumers can low in to which operatesat
meant
enjoy prices, comparison a
monopoly,
which thatconsumers
Mc MR, means are exploited with
higher prices. Lower
prices means
=
thatconsumers have more real disposable income, which increased their effective demand,
thus their standards of
increasing living.
Another
advantage of a contestable marketi s that
armsare closer to
being productively
they are the
efficient. Thiscan be seen on
figure 1, as
operating closer to minimum efficient
compared to
scale, at the pointacon, Pcon
very
is close to the MES, than a
monopoly,
which restricts output much, itto be from the M25. However, in a
so
causing very far
contestable
outputi snotrestricted firms economiesof
market, as
much, so
enjoy more scale.
therefore this means that more people can access the good, increasing
the material living
standard of people.
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