3.4.7 - Contestability

Question 1

What is contestability?

Answer 1

the ease of which new firms can enter the market
relative freedom of entry/exit, low sunk costs - ‘non-recoverable costs’

Question 2

What are the effects of contesability?

Answer 2

• freedom of entry/exit means existing firms always face the threat of new firms entering
• sufficient to keep prices near a competitive equilibrium and profits low, otherwise new firms enter
• the ease of which new firms can enter the market

Question 3

Contestable monopolies

Answer 3

Monopoly firms will still behave competitively, danger of ‘hit and run’ profits -> new firms enter, steal, leave market. this keeps firms at Normal profit (AC=AR)

Question 4

What is the degree of contestability?

Answer 4

this is determined by factors and barriers, how contestable a market is

Question 5

Factors of contestability

Answer 5

• high sunk costs - can’t get money back
• high advertising/marketing costs -> brand loyalty
• copyrights
• economies of scale
• legislation/regulation
• production costs
• asymmetric information

Question 6

What is the effect of the internet on contestability?

Answer 6

Internet -> increased contestability and eases barriers to entry (AN/EV)

Question 7

Government intervention in contestability

Answer 7

• force firms to have less barriers to entry
• fine competitors, break firms apart
• encourage small firms to set up (subsidise)

Question 8

Competitiveness indicators

Answer 8

in a market, the level of profit and number of firms all indicate the competitiveness of a market