Firms that operate in contestable markets:

Question

Quizplus · Accepted Answer

Firms operating in contestable markets know that they face the threat of potential entry by new firms, which keeps them competitive in setting prices. They cannot afford to set high prices and earn above-average profits as that would attract new entrants into the market. Therefore, they have to earn zero economic profits or low profits in the long run to remain in business. The level of fixed costs does not affect the level of competition faced by firms in contestable markets.

Firms That Operate in Contestable Markets