Contestability

Question 1

What is contestability

Answer 1

How easy it is for a firm to enter the market

Question 2

What are the characteristics of a contestable market

Answer 2

low barriers to entry and exit - no sunk cost
perfect information
“hit and run” competition

Question 3

What is “hit and run competition”

Answer 3

New firms enter the market , they make SNP then leave do they have no sunk costs

Question 4

In the long run where do firms operate in a contestable market

Answer 4

AR=AC
sales max
break even
Normal profit
Limiting price strategy

Question 5

Why may firms operate at sales max in the short run

Answer 5

AR=AC
limiting pricing - to prevent new firms from entering the market so they cant cover their costs of production

Question 6

If the market is more contestable what does that say about the number of firms

Answer 6

The number of firms will increase due to lower barriers to entry , lower sunk costs

Question 7

In the long run where do contestable firms operate at

Answer 7

Allocative efficiency –> AR=MC . they’re producing at the lowest point on their AC curve
prevents the exploitation of consumers

Question 8

Why may firms stay in a market where there are high barriers to entry and exit

Answer 8

If they can cover their sunk costs of production and make a SNP during their operating period

Question 9

Why do new firms not enter a market with a natural monopoly

Answer 9

Economies of scale are so large that no firm will be able to exploit MES.
They wont be able to allocatively efficient

Question 10

What are innocent barriers to entry

Answer 10

Barriers which aren’t present due to firms in the market