Question

For the theory of contestable markets to work, four conditions have to be met: no barriers to market entry, no economies of scale present, consumer willingness to switch between carriers, anda. sellers and buyers of such small size that price or supply cannot be influenced.b. existing carriers prevented from responding to new entrants' lower prices.c. mutual interdependence between various sellers.d. no one seller controls a significant portion of the market.

Answer 1

Answer:

B) existing carriers prevented from responding to new entrants' lower prices

Explanation:

The theory of contestable markets refers to markets with no entry or exit barriers. It was developed by William Baumol. In a contestable market, the number of participating firms is not important. For example, an oligopoly might exist, but if the entry barriers are low they will be forced to act competitively.

What makes existing firms competitive in this type of market, is the risk of new competitors entering the market and reducing their market share. That is why companies will try to make normal profits, because if they are too profitable, lots of potential competitors might enter the market and grab their customers.