4.5 Microeconomics Contestable Markets Flashcards
Contestable market
A market in which the existing firm makes only normal profit. The firm in the market perceives a potential threat from firms who might join the market.
Characteristics of contestable markets
No barriers to entry or exit, no sunk costs, have no competitive disadvantage compared with the incumber and have access to the same technology.
Sunk costs
The costs from setting up a business which cannot be recovered when the firm leaves the market.
Hit and run entry
Where a firm enters a market to take short run supernormal profits knowing it can exit without incurring costs.
Is a contestable market efficient?
Firms are forced to be more efficient where price= AC and make only normal profits or operating at the lowest point on the AC curve to reduce the threat from a rival. If also P=MC which would be both productively or allocatively efficient.
Normal profits
Where AC=AR costs including opportunity cost.
Supernormal profits
Where AR>AC.
Examples of contestable markets
Air B’n’B, Brewdog, small retailers, parcel deliveries
What does a contestable market depend upon?
Low sunk costs- not always guaranteed. Firms need to advertise and these costs will not be recouped. Also it depends how the incumbent firm operates- when a rival enters, it may lower production costs to force the rival out.
Incumbent firm
Firm already in the market.
Competition and Markets Authority
Government regulator which uses the law to increase competition in markets.
Bid rigging
An agreement between firms to set the prices when bidding for a contract.
Territorial Exclusivity
Companies divide up geographical areas so that there is one supplier to the area to maximise profits.
Resale price maintenance
Suppliers instructing sellers on the price they can sell the good for.
Nationalisation
The process of transforming private assets into public assets by bringing them under public ownership.
When were many UK firms and industries nationalised?
After 1945
Which political leader began privatising nationalised industries in the 1980s?
Margaret Thatcher
What were the arguments for privatisation?
increased income for the government from the sale of shares, competitive markets and profit incentive will lead to efficiencies.
How did the Labour government after 1997 continue to move public to private ownership?
PFIs- Private Finance Initiatives.
What was the last major state owned firm to be privatised in 2013-16?
The Royal Mail
What are two arguments against privatisation?
Leads to monopoly power and higher prices
Can lead to a lack of investment as firms pay dividends.
Difficult to regulate competition in natural monopolies
