4.5 - contestable markets

Question 1

Characteristics of contestable markets

Answer 1

Low barriers of entry / exit
Low sunk costs
Low rate of consumer loyalty
Producers have perfect knowledge

Question 2

Are firms allocatively efficient

Answer 2

Yes

Question 3

Are firms productively efficient

Answer 3

Yes

Question 4

Are firms x-efficient

Answer 4

Yes

Question 5

Strengths of contestable markets

Answer 5

Fair prices for consumers
Productively + Allocatively efficient
Lots of innovation

Question 6

Weaknesses of contestable markets

Answer 6

Hit and run competition – firms entering market to take advantage of high profit
High sunk costs