Question

Contestable markets true or false: if a firm is operating in a contestable market, it should operate at the efficient production level and earn zero profit. true false the contestable market model has important policy implications. if there is concern that a market is not sufficiently competitive, what can policymakers do to increase competition in a given industry

Answer 1

The first statement is false. A firm earning a zero profit is an action called predatory pricing, which there can be a temporary loss because of a super low price and when a new firm enters the market the new firm won’t be able to compete with a very low price forcing the new firm out of the market. This action can be a barrier of entry making the market less contestable. A firm in a contestable market should operate at efficient level of production and earn a minimal profit close to equilibrium.

It is true that a contestable market model has important policy implications for example to increase competition policy maker can decrease regulation so that new firm can easily enter the market. Policy makers can also force firms to allow other firms to use their networks encouraging new firms to enter the market and lessening the monopoly power of restricting supplies. Policy makers can also set up its own new firm and distribute its resources to small new firms to increase competition.