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Hit-and-run entry

This is a special case of entry that exists in markets that are highly contestable. The lack of sunk costs and the ability to freely enter and exit means that new firms can enter the market and undercut the current incumbent firms to steal the abnormal profit. They can quickly leave the market costlessly before the incumbent has had time to react with a price match. This explains why markets that are classed as contestable, will often see incumbents charging a price close to the marginal cost to prevent being undercut.

Below illustrates the logical sequence of reasoning why incumbent firms keep prices extremely low despite the high degree of market power they have, as they are vulnerable to hit-and-run entry. By keeping prices low the profit rewards and incentives of hit-and-run entry is reduced and incumbent firms feel more secure in their market position. So peversely in these types of market the best way to maximise profits in the long-term is to make small profits in the short-term.


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