What is the difference between the contestable market model and the cartel model

Question

What is the difference between the contestable market model and the cartel model of oligopoly? The pricing outcome for a contestable market is equivalent to a competitive industry. The pricing outcome for a cartel is equivalent to a monopoly. In the cartel model, firms react to other firms when setting their prices. In the contestable market model, firms react to other firms when setting their prices. In the cartel model, competitiveness is judged more by performance and barriers to entry than by structure.

Explanation / Answer

The correct answer is A

Cartels like OPEC operate in a manner similar to monopoly. Hence the optimal level of production is the one at which marginal cost equals the marginal revenue. There are barriers to entry and in contrast, contestable market has free entry and exit which implies zero economic profit in the long run. So this market reflects the mechanism of perfectly competitive industry.

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