azizadil1998
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I read somewhere previously that the level of profit in a market does not necessarily have to indicate the overall contestability of the market.

From what I know, if there are supernormal profits, this doesn't have to mean that the market is less contestable, there could still be a threat of competition and it could be due to hit and run entry right? I'm a bit unsure about the long run implications though. I am guessing sustained supernormal profits will mean the market is not that contestable right? But that's how it is in theory - for evaluation I can say practically speaking it can mean firms have a degree of price setting power as no market is perfect so they can make supernormal profits in the long run.

If anyone can clear the short run and long run implications of supernormal profits in determining how contestable a market is that would be greatttt.. thanks!
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username2859410
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In the short run, firms will enter the market as there are supernormal profits to be made however in the long run they will get competed away so firms will not enter to exploit these gains.
I think what you're saying might come under pricing strategies? price fixing/predatory pricing/limit pricing ect?
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azizadil1998
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(Original post by samantham999)
In the short run, firms will enter the market as there are supernormal profits to be made however in the long run they will get competed away so firms will not enter to exploit these gains.
I think what you're saying might come under pricing strategies? price fixing/predatory pricing/limit pricing ect?
Yea but thats how it works in perfect and monopolistic competition - im talking about determining how contestable a market is, could looking at simply the level of profit being made tell you much about the contestability, if so to what extent? And no im very strong on pricing i get those.. maybe u didnt get my question idk haha
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rasclerhys
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Correct, supernormal profits in the short-run tell us nothing about the contestability of the market.

In the long-run if there are supernormal profits then we would expect the firm to have monopoly power, otherwise a firm would have entered and competed away some of the profits. But as you say it is all a matter of degree - small supernormal profits may exist in the long-run even in a relatively competitive (contestable) market. So how you want to evaluate the size of this becomes tricky - do you look at supernormal profits relative to overall revenue? Or what other measure should a regulator look at? There isn't really a definitive answer, it is just a matter of opinion.
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azizadil1998
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(Original post by rasclerhys)
Correct, supernormal profits in the short-run tell us nothing about the contestability of the market.

In the long-run if there are supernormal profits then we would expect the firm to have monopoly power, otherwise a firm would have entered and competed away some of the profits. But as you say it is all a matter of degree - small supernormal profits may exist in the long-run even in a relatively competitive (contestable) market. So how you want to evaluate the size of this becomes tricky - do you look at supernormal profits relative to overall revenue? Or what other measure should a regulator look at? There isn't really a definitive answer, it is just a matter of opinion.
Even better I suppose! can rack up the evaluation marks lool. Expecting a contestability or regulation 16 marker in my unit 3 edexcel exam (resit). last year was benefits of merger and kinda contestability related question so its probably gonna be regulation or intervention.
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