Suppose there are no barriers to entry in the market for facial tissues, where two brands dominate the industry. According to the theory of contestable markets, the price charged for facial tissues will be:
A) far below the cost of producing a box of facial tissue.
B) far above the cost of producing a box of facial tissue.
C) roughly equal to the cost of producing a box of facial tissue.
D) much higher for the number-one-selling brand than it is for the number-two-selling brand.

Question

Quizplus · Accepted Answer

In a contestable market, the threat of potential entry forces existing firms to set prices close to the cost of production to deter new entrants, ensuring prices remain competitive.

Suppose There Are No Barriers to Entry in the Market