Concept Clarification: Contestable Markets (1)

This is a first of a series of post discussing the concepts of contestable markets and contestability.

An analogy

Jesse likes to play street soccer with his friends. There’s a street court in the neighbourhood that they always go to. It’s surrounded by a fence that’s 10 metres tall. Because Jesse’s dad is friends with the town council manager, he gets priority to the keys. Other kids can’t come in and play with them.

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Why Price War is Not Price Competition

If you want to sell something at $10 but no one buys from you, what would you do?

Like every other firm, you will probably choose from one of two options:

  1. Lower your price.
  2. Make your product (seem) better.

In a perfectly competitive market, option 2 is literally not an option. Producers all sell identical products and consumers know it for a fact. So in a perfect competition, you are left with option 1.

But hang on. Aren’t firms in perfectly competitive markets price takers? Why would they be able to control the price? Continue reading →

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