22 Contestable markets Flashcards

1
Q

Contestable market

A

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

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2
Q

Characteristics of a contestable market

A
  • 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
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3
Q

Advantages of a contestable market

A
  • 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)
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4
Q

Disadvantages of a contestable market

A
  • 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
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