Contestability and Perfectly Contestable Markets

The video explores the concept of contestable markets, focusing on the role of barriers to entry and exit, and the impact of sunk costs and technology access. It distinguishes between perfect contestability and perfect competition, highlighting that perfectly contestable markets may not have many firms. The video explains hit and run competition, where new entrants exploit supernormal profits, and discusses how incumbents can prevent this by maintaining normal profits. The importance of market contestability is evaluated, emphasizing that the threat of competition can influence pricing strategies.

Explain the concept of 'hit and run competition' in the context of contestable markets.

How can incumbents prevent new entrants from taking their market share in a contestable market?