Contestability Flashcards
1
Q
Contestable market
A
A contestable market is one with a high threat of new entrants which keeps firms producing at a competitive level.
2
Q
Characteristics of a contestable market
A
- Perfect knowledge
- Freedom of entry and exit
- Low product loyalty
- Profit maximisers
3
Q
Implications of high contestability
A
- The use of limit pricing by firms
- Firms can only make normal profits in the short run
- Likely productive and allocative efficiency
4
Q
Sunk costs definition
A
A fixed cost that a business cannot recover if it leaves the industry.
5
Q
How to measure contestability
A
Degree of contestability is measured by the extent to which the gains from market entry for a firm exceeds the cost of entering the market.
6
Q
Perfectly contestable market
A
- No sunk costs
- No barriers to entry/exit
7
Q
Reasons for increasing contestability
A
- Deregulation
- Competition policy- less pred pricing (illegal)
- EU single market
- Rise of the internet- improved information
8
Q
Evaluation of contestability
A
- It’s difficult to measure
- Depends on cost structure of different firms
- Degree of contestability
- Regulation
- Level of technology
9
Q
How technology has increased contestability?
A
- Reduces barriers to entry
- Reduces start up costs
- Less workers needed- less regulation
- Technical economies of scale
- Easier to advertise
- Improved innovation
10
Q
How threat of entry affects monopoly behaviour?
A
- Move towards AC=AR
- Improves competitivity
11
Q
Disadvantages of high contestability
A
- Lack of dynamic efficiency
- Cost cutting in dangerous areas
- Anti-competitive strategies
