3.4.7 Contestability Flashcards
1
Q
What are some characteristics
A
- Pool of new entrants
- High levels of information
- Low entry/exit barriers
- Incumbent firms subject to hit and run competition
2
Q
What is the main of implication of contestable markets to incumbent firms ?
A
- Limit pricing strat, AC=AR
3
Q
Why do firms limit price
A
- Makes normal profit to make it unattractive to markets planning to enter
- Reduces incentive to enter market
- Prepared for threat of entrance of new firms
4
Q
What is the significance of technology for contestable markets ?
A
- Firms will have higher levels of information
- Lowers entry barriers, increases pool of entrants
5
Q
What are some advantages of contestable markets ?
A
- Allocative effeciency
- Productive efficiency
- Increased employment
6
Q
How does increased employment occur ?
A
- The increase in output may lead to firms employing more employees to meet higher QD
7
Q
Allocative efficiency ?
A
- Produce at price closer to allocative effeciency
8
Q
What are some examples of sunk costs ?
A
- Patented technology
- Specialist machinery
- Advertisement/marketing
9
Q
What’s the definition of a sunk cost
A
- A cost which is unrecoverable on exit of market
10
Q
What are some disadvantages of contestable markets
A
- Cost cutting in dangerous areas, such as wages and health and safety may have harmful impacts on wider soceity
- Creative destruction - where firms innovate however their resources are misallocated
11
Q
What are some in depth eval
A
- Technology may increase firms ability to make patents, reduction in contestability.
- Also may lead price discrim .
12
Q
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A
