9.8 Contestable Markets

Question 1

Perfectly Contestable Market Characteristics

Answer 1

• No barriers to entry or exit for firms
• Large potential pool of new entrants
• There is perfect information/knowledge of market conditions
• ‘hit and run’ competition

Question 2

Contestable Market Performance Pros

Answer 2

• Allocative efficient outcomes can be achieved
• Productive efficiency can be achieved
• X-efficiency can be achieved

Question 3

Contestable Market Performance Cons

Answer 3

• Dynamic efficiecy is less likely to be achieved
• The actual quality of outpu may not be as good and product a safety concern
• Contestable markets can result in creative destruction (although arguably a pro)

Question 4

Contestable Market Performance Evaluation

Answer 4

• Depends on how significant the increase in contestability is
• Markets may not be contestable in the long term
• Regulation must exist that prevents entry limit pricing
• There is a strong role for regulators to ensure that markets are contestable in the long run.
• Technological advancements can signficantly improve the contestability of a market without the need for government policy