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Mergers within industries such as banking, telecommunications, and airlines have created a stir among consumers who charge that economic freedom and efficiency are being sacrificed in favor of corporate profits. The theory of contestable markets postulates that firms in imperfectly competitive markets may act as though they operate in a purely competitive market when entry and exit are perfectly (or nearly) costless. Firms generate a normal profit when faced with the threat of additional market consumers can continue to enjoy the lower prices that accompany competition; the merger between firms and subsequent strengthening of business concentration may not have detrimental effects on consumers. The United States Department of Justice has used this theory on antitrust cases to rule in favor of the defendant. Students will read an overview of the contestable markets hypothesis and determine whether or not it is applicable to the airline mergers and to the Microsoft antitrust case. In this lesson, you will determine whether mergers and monopolies within certain industries have negative effects on consumers based on the theory of contestable markets.
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