Contestable market

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  • Created by: Tom
  • Created on: 08-01-14 15:16
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  • Contestable market
    • The number of firms in the industry may vary from one to many
    • Freedom of entry and exit
      • some barriers to entry are innocent/ natural e.g. sunk costs of advertising
    • Firms compete rather than collude
    • Firms are short run profit maximisers... (MR=MC)
    • Firms can produce homogeneous and non-homogeneous goods
    • Perfect knowledge
    • Abnormal profits can only be earned in the short run
      • New firms will be attracted to the industry through abnormal profits
    • Firms are attracted by Abnormal profit, hence to prevent competition a monopoly can charge normal profit in the short run.

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