5.10 Contestable And Non-contestable Markets

Question 1

What is a contestable market?

Answer 1

A market in which the potential exists for new firms to enter the market. A perfectly contestable market has no entry or exit valleys and no sunk costs, and both incumbent firms and new entrants have access to the same level of technology (no sunk costs)

Question 2

What is a contestable market in simple terms?

Answer 2

A market which is continuously changing due to low barriers to energy and exit

Question 3

Is the number of firms in a contestable market considered important?

Answer 3

No-more focus on threats to creating barriers to entry

Question 4

What are the 4 key conditions for a contestable market?

Answer 4

-no barriers to entry

-access to all available technologies

-no sunk costs

-low rate of existing customer loyalty

Question 5

What are sunk costs?

Answer 5

Costs that have already been spent and is not recoverable (acts as a barrier to entry)

Question 6

What did the government traditionally think the best way to reduce monopoly power in the markets was

Answer 6

Regulation

Question 7

In the contestable market theory what is monopoly power dependent on?

Answer 7

The difficulty with witch new firms can enter the market (not concentration ratios or the number of firms in the market)

Question 8

Why does the contestable market theory that actual competition is not important?

Answer 8

The threat of potential competition is enough to ensure efficient and non-exploitative behaviour by existing firms in a market

Question 9

Why has the contestable market theory had an impact on UK monopoly policy recently?

Answer 9

Policy Implies provided there is adequate potential for completion
Regulation is not needed

Instead of interfering with firms output and pricing policies the gov should restrict the role of monopoles to discover which industries are potentially contestable

Question 10

What does the contestable market theory say about deregulatory policies ?

Answer 10

Should he used to develop conditions in which barriers to entry and exit are minimised

Question 11

Appropriate policies suggested by the theory of contestable markets include the removal of ______
(3 asp)

Answer 11

1. Controls of ownership p(such as exclusive public ownership)
2. Licensing regimes for public transport, TV and radio transmissions

-price controls which act as a barrier to entry

Question 12

How are fixed costs different to sunk costs?

Answer 12

Fixed cost would be buying machinery because it can be sold

If machinery has no second hand value (can’t be sold) and had to be deposited of its a sunk cost

Question 13

What do sunk costs discourage?

Answer 13

Hit and run competition?

Question 14

What is hit and run entry?

Answer 14

When a firm enters a market to take advantage of temporary supernormal profits

Question 15

What Is hit and run competition (def)

Answer 15

Occurs when a new entrants can ‘hit’ the market and make profits and ‘run’ as there are no barriers to exit

Question 16

When do hit and run competition leave the market?

Answer 16

When the supernormal profit has been completed away

Question 17

Why is hit and run competition a good thing for consumers?

Answer 17

Keeps prices and profits at their lowest possible levels which increases consumer surplus

Question 18

Diagram for a monopoly setting a contestable market price lower to prevent the market being contested?

Answer 18

Price from Pm to Pc (essentially same as limiting pricing)

Question 19

Where would profits be maximised

Answer 19

MC=MR

Question 20

At what point would the firm break even?

Answer 20

Where AR=ATC

Question 21

Where is rev maxed

Answer 21

AR=MC

Question 22

Where is output maxes?

Answer 22

AR=MC