Hit and run competition occurs when a firm temporarily enters a market and then leaves when supernormal profits are exhausted.
Hit and run competition is considered to be a feature of a contestable market. A contestable market has low barriers to entry and exit. Therefore, if firms in the industry are making supernormal profits, there is an incentive for a new firm to enter and take advantage of the high profits.
If the industry no longer makes supernormal profits, it is easy for the firm to exit and leave without excessive costs.
The threat of hit and run competition may be sufficient to keep prices and profits low. If the market is perfectly contestable, firms might wish to engage in some form of limit pricing to avoid the disruption of hit and run competition.
Example of Hit and Run Competition
If a type of clothing becomes particularly fashionable (for example the Onesie), firms can set high prices and make supernormal profits. However, this will encourage other firms to enter into the market and also produce Onesies. If it falls out of fashion, some clothing firms will leave that particular segment of the clothing market. Therefore, firms may enter the ‘Onesie’ market for just a short time – a classic example of hit and run competition.
Hit and run competition may also be highly seasonal. For example in the peak of summer, being a tourist guide becomes quite profitable. Therefore, some entrepreneurs may temporarily enter the market until supernormal profits are exhausted at the end of the tourist season.
Requirements for Hit and Run Competition
- Good information about the profitability of the industry.
- Low barriers to entry and exit
- Low sunk costs. Sunk costs are unrecoverable and so will create a costly exit – discouraging hit and run competition.
- Recoverable costs. Capital that can easily be sold if the firm needs to leave.