Contestability Flashcards
1
Q
What is a contestable market?
A
a market where there is a threat of competition (not always actual competition though) which affects behaviour of firms
2
Q
What characteristics make a threat of competition?
A
- low barriers to entry / exit
- large pool of potential entrants
- good information
- incumbent firms subject to ‘hit and run’ competition
3
Q
How has technology increased contestability?
A
- reduced barriers to entry/exit - businesses no longer have to be physical (sunk costs/start-up costs, fewer workers potentially)
^^ advertising easier - reduce brand loyalty - increase pool of potential entrants (increased innovation e.g Uber and cheaper ways to produce things, thanks to tech)
- increased information (internet, communication)
4
Q
What will a monopoly do if market becomes contestable?
A
move from profit maximising towards AC=AR (sales max)
^^
- eliminate threat (decrease firms’ incentive)
- prepared if firms actually enter market (more competitive with lower prices/higher output)
5
Q
Pros of contestable market
A
- allocative efficiency (low p high q, increase con welf)
- productive efficiency (EOS, low cost, low pri)
- reduced x-inefficiency (low cost, low pri)
(^^ due to threat of competition) - job creation (due to high quantity of output = derived demand)
6
Q
Cons of contestable market
A
- lack of dynamic eff (reduced profit margins)
- cost cutting dangerous areas (e.g wages/ health and safety)
- creative destruction (new firms overthrow old firms - increase job losses)
- anti-competitive strategies - (long run anti-comp used, contestability may not last and thus benefits)
7
Q
Evals for contestable market
A
- no lack of dynamic eff if new firms come in with innovative ideas
- length of contestability (new firms patent ideas/anti-competitive strategies = decreased contestability)
- tech (patents can reduce)
^^ could increase info for producers - more price discrimination - regulation reduces cost cutting and anti-comp strats
