3.4.7

Question 1

What is contestabilty?

Answer 1

This refers to how open a market is to new competitors.

Question 2

What are initial costs?

Answer 2

Start-up costs

Question 3

What are sunk costs?

Answer 3

Costs that can’t be recovered when a firm leaves the industry.

Question 4

What are patents?

Answer 4

Laws that give firms legal protection against firms copying production methods.

Question 5

What is the hit-and-run tactic?

Answer 5

This is when firms enter a market when super-normal profit can be made and leave the market when prices have been driven down to normal-profit levels.

Question 6

How can a firm reduce their sunk costs?

Answer 6

Lease equipment rather than buy it.

Question 7

In a contestable market what affects the behavior of incumbent firms?

Answer 7

The threat of actual competition and potential competition within the market

Question 8

Name 2 things that affect the contestability of a market

Answer 8

• Sunk costs
• Levels of advertising and brand loyalty
• Vertical integration
• Access to technology and skilled labor
• Patents
• Trade restrictions

Question 9

What’s vertical integration?

Answer 9

When a firm joins to another firm, in any stage (forward or behind) in the production process.