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In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, held that there are markets served by a small number of firms that are nevertheless characterized by competitive equilibrium, and therefore desirable welfare outcomes, because of the existence of potential short-term entrants. [1]
According to the theory of contestable markets, if few enough firms are in the industry so that one would expect positive economic profits, the prospect of other firms entering the market may cause firms in the industry to set prices as if those other firms were already in the market; thus actual entry by those firms is not necessary for the ...
Also called resource cost advantage. The ability of a party (whether an individual, firm, or country) to produce a greater quantity of a good, product, or service than competitors using the same amount of resources. absorption The total demand for all final marketed goods and services by all economic agents resident in an economy, regardless of the origin of the goods and services themselves ...
A firm usually has market power by having a high market share although this alone is not sufficient to establish the possession of significant market power. This is because highly concentrated markets may be contestable if there are no barriers to entry or exit. Invariably, this limits the incumbent firm's ability to raise its price above ...
National economies can also be classified as developed markets or developing markets. In mainstream economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services, with or without money, is a transaction. [1]
Examples of close-to-perfect markets typically include share and foreign exchange markets while the real estate market is typically an example of a very imperfect market. In such markets, the theory of the second best proves that, even if one optimality condition in an economic model cannot be satisfied, the next-best solution can be achieved ...
Market definition may be difficult to measure but is important because if it is defined too narrowly, the undertaking may be more likely to be found dominant and if it is defined too broadly, the less likely that it will be found dominant.
Economic profit can, however, occur in competitive and contestable markets in the short run, since short run economic profits attract new competitors and prices fall. Economic loss forces firms out of the industry and prices rise till marginal revenue equals marginal cost, then reach long run equilibrium.