When contestable markets exist,
A) it must be an oligopoly
B) the firms set high prices and earn economic profits
C) the threat of new firms entering keeps prices low
D) the government must take steps to regulate the firms
E) laissez-faire can lead to greater market concentration

Question

Quizplus · Accepted Answer

Contestable markets are characterized by the ease with which new firms can enter and exit, which means that the threat of potential competition keeps prices close to the cost of production, preventing existing firms from setting high prices and earning excessive profits. This concept does not necessarily imply that the market must be an oligopoly (A), that firms can set high prices and earn economic profits (B), that government intervention is required (D), or that laissez-faire policies will lead to greater market concentration (E).

When Contestable Markets Exist