What does Contestability Markets do to Incumbent Firms?

-The Threat of Increased Competition (and Actual Competition) can affect the Incumbent Firm's Behaviour. -Incumbent Firms, knowing what High Supernormal Profits can lead too, can set Prices at a Lower Level to not allow New Entrants -Barriers to Entry be set Higher if they can. This can Involve Advertising or that it would be Willing to engage in a Price War (Must be within the Law) -In the Long Run, Firms in a Contestable Market will become more Productive and Allocative Efficiency, as Supernormal Profit has Shifted to Normal Profit