(1) What is the contestable market hypothesis? What are the assumptions associated with the theory of...

(1) What is the contestable market hypothesis? What are the assumptions associated with the theory of perfectly contestable markets?

(2) Illustrate graphically that a natural monopoly is a contestable market

Expert Solution

Ans 1) Contestable market hypothesis - This concept of economics says that the companies which has few opponents, act in competitive way when the area or market they work in has less or weak limitations to entry. The word Contestable means that opponent company who wish to enter the market can challenge the existing company. In this form of market , companies can easily movie in and out with less sunk cost.

Features

1)There are no barriers to entry and exit of companies.

2)It has no sunk cost.

3) Existing and new firms both will have same technology level for use.

Assumptions

1)Even if it is monopoly market or oligopoly market, companies which are dominant in market will behave competitively, when there are limited barriers or bars for competitors.

2) The 2 main assumptions are that this market doesn't have any sunk cost and even economies of scale. Due to these main assumptions, natural monopoly is considered as least Contestable form of market.

Rahul Sunny answered 8 months ago

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