Am I forgetting Basics????

Which of the following statements is most accurate regarding the theory of contestable markets? A) The greater the number of industry participants, the more competitive the pricing. B) Increased regulation in an industry results in more competitive pricing and fewer barriers to entry. C) If an industry has low barriers of entry and exit, the number of market participants does not affect pricing competitiveness in an industry. D) An industry’s barriers to entry and exit must be high in order to have competitive pricing among the low cost producers of the industry.

crap. a?

contestable markets huh??? A?

Perfect competition in any industry would maintain price to it’s equilibrium level’s … A?

C, i would say. if barriers to entry are low, it doesn’t matter whether there are 20 firms or 100 firms. the market will be at a super-competitive level no matter what A has some merit. i’d say it’s true in some cases, but not always true. of course, it’s vague wording/concept and trying to remember some exact phrase they used in the text as opposed to effective learning… buy hey, who am i??

i have to admit i didn’t know what contestable markets meant. i don’t remember that wording from the readings, but i certainly remember the general concepts behind it.

C Edit: Theory of contestable markets says that when the barrier to entry and exit is low, then lots of participants can enter and exit without making any significant investment or losing a lot of money when they exit. So, the market becomes more competitive.

c) I like it a little more than A

Damn, now I like C. If only I could change my answers on the real test this often.

yeah, in university, i think they used carrot farming as a competitive industry. no excess profits. so does it really matter if one more guy gets into carrott farming when there’s already 10,000 guys doing it?.. now if budweiser decides to develop and market a cola product, then that will have an effect on the very oligopolistic cola market. of course, budweiser will likely lose their shirts so they won’t do it.

sams-club cola (cott/RC cola mix/manufacturer) is probably better example than budweiser.

A) may have some merit in the abstract, but c) is essentially the definition of a contestable market. Answer is definitely c).

It’s definitelty C) The theory of contestable markets is that even if Starbucks has a monopoly in China, they cannot charge whatever they want, because of the low barriers of entry. If they were to charge too much, a local company, let’s callit Xing Ba Ke could easily be setup and compete with Starbucks. PS: I hope that the Mandarin speakers got my joke

A. B - increased regulations results in MORE barriers to entry. C - in industries with few barriers to entry/exit, economic profits attract more market participants, which easily enter the industry and reduce economic profits and hence impact competitive pricing D - can’t remember, but it looks wrong.

the starbucks example is not a good example … starbucks has its strong position because it’s product is differentiated from market. so many of its customers don’t care if 3 or 4 new places open on the block… your franchise chain coffee places is a better example.

darkhelmet Wrote: ------------------------------------------------------- > A. > > B - increased regulations results in MORE barriers > to entry. > C - in industries with few barriers to entry/exit, > economic profits attract more market participants, > which easily enter the industry and reduce > economic profits and hence impact competitive > pricing > D - can’t remember, but it looks wrong. The question is not what is the most correct statement, but which one “is most accurate regarding the theory of contestable markets” A) does not relate with the theory of contestable markets I confirm my choice for C)

darkhelment, your explanation for “c” is incorrect. Because the barriers to entry/exit firms are able to enter when profits are high enough (which you explained) and exit when they get low (the part you didn’t include). The mere fact that is is so easy to enter/exit keeps the prices competitive.

C

the number of firms is irrelevent. a market is either competitive or it isnt’. yes, oligopolistic type markets have few firms, and competitive markets have many firms. but A is too much of a generalization of this idea. but it doesn’t matter whether carrott farming has 10,000 farms or 15,000 farms as long as it’s competitive. these are more the numbers we are talking about.

cfafs1, wanderingcfa and dineshhh… sorry boys…A is the Wrong Answer Correct answer is C… I would’ve chosen A too but as olivier pointed out since the question is specifically asking about the theory of contestable markets…C becomes the correct answer… I’m not sure I’m entirely convinced…that A is wrong though… let me try and understand why A might be wrong… I guess it’s not ALWAYS true that as the number of participants increases the pricing is more competitive…as pointed out above - if there are already 10,000 businesses…then a couple more are not going to change the pricing… is this a correct way to think about this!!! siighh…I didn’t even remember there was a theory of contestable markets in the damn curriculum…