Niceville, Ohio, only has two dentists, while the surrounding communities have many more on a per capita basis. The demand for dental services is such that these two dentists could agree to raise their prices (they play golf together every Saturday) and earn economic profit. Instead, they choose to price competitively and earn what other dentists earn. What might explain this?
The dentists probably know that economic profit would attract dentists from other areas and that, over time, their profits would be competed away. Because they do not desire further competition, their pricing policies are designed not to attract any. The theory of contestable markets can explain this behavior.
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