5.10 contestable and non- contestable markets Flashcards
what is a contestable market
one where their is a threat of competition
what does a perfectly contestable market feature
no entry or exit
no sunk costs
access to same level technology allowed for existing and new firms
features of contestable market?
low barriers to entry/ exit
large pool of potential entrants
good information
incumbent firms subject to hit and run competition
what is hit and run competition
when new entrants can hit the market make profit and then run given the low or no barriers to entry
how has technology increased contestability
lower barriers to entry an exit as business don’t have to be physical anymore reducing cots in workers start up costs etc. economies of scale easier and advertising is easier
increased the pool of potential entrance, due to greater innovation e.g. uber and air bb, and allowed for firms to find cheaper ways to produce things
improved information due to internet firms can find out easier costs and technology. also communication is easier
what is an outcome of contestability on monopoly?
could be contestable if barriers to entry are low enough to be a threat of entry, monopoly will move from profit maximisation as it makes no sense due to strong threat of entrance monopoly would move towards normal profit at AC=MC (limit pricing) to eliminate threat by taking away incentive if still making supernormal profit.
also monopoly prepares if threat becomes real.
this results in lower prices and higher quantity (GOOD FOR CONSUMERS)
what are the pros of moving to more competitive markets
movement towards allocative efficiency
movement towards productive efficiency
movement towards x efficiency
job creation due to derived demand
what are the cons of moving to more competitive markets
lack of dynamic efficiency
cost cutting in dangerous areas
creative destruction,
anti competitive strategies, patient new ideas
technology could reduce contestability due to copy right
