22 Contestable markets Flashcards
1
Q
Contestable market
A
Market structure in which no firm can dominate enough to make supernormal profits
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
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)
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