22 Contestable markets

Question 1

Contestable market

Answer 1

Market structure in which no firm can dominate enough to make supernormal profits

Question 2

Characteristics of a contestable market

Answer 2

• no barriers to entry or exit
• no sunk costs that may prevent firms from entering or exiting
• all firms can access new technology
• little to no consumer loyalty
• can exit and enter quickly

Question 3

Advantages of a contestable market

Answer 3

• firms can operate with allocative and productive efficiency which means lower prices for consumers
• incentives for firms in the market to operate at lower costs (X-efficiency)

Question 4

Disadvantages of a contestable market

Answer 4

• market is unlikely to have no sunk costs, meaning firms are unlikely to be forced to operate at the most efficient level
• most markets have some consumer loyalty, meaning firms are unable to operate at most efficient level