Perfectly Contestable Market Definition

Steps:

• Recall that a perfectly contestable market theory, by Baumol, assumes no barriers to entry or exit for potential competitors.
• Identify that zero entry/exit costs enable hit-and-run entry, disciplining incumbents via threat of competition.
• Match this to choices: A describes zero costs, aligning with the theory.
• Eliminate others: B and C imply barriers, D is unrelated pricing strategy.

Why the correct option is correct:

• Option A matches the core definition, where zero entry/exit costs ensure potential entrants can challenge incumbents without risk, promoting efficiency.

Why the others are wrong:

• B: High barriers prevent contestability by blocking entry/exit.
• C: High sunk costs create irreversible investments, acting as entry barriers.
• D: Price discrimination is a pricing tactic, not related to market entry conditions.

Final answer: A