Contestability

Question 1

What are the characteristics for a contestable market?

Answer 1

Low barriers to entry and exit
Entry and exit must be costless
A competitive environment is common in most industries even when there appears to be one or more dominant businesses with significant market power

Question 2

What conditions are needed for market contestability?

Answer 2

A pool of new businesses
No significant entry or exit costs
Equal access to available industry technologies
High rates of customer switching

Question 3

What are some types of barriers to entry and exit for contestable markets?

Answer 3

EOS
Vertical integration
Brand loyalty
Control of key technology
Expertise, goodwill and reputation

Question 4

What are examples of sunk costs?

Answer 4

Asset write offs
Closure or project cancellations
The loss of business reputation

Question 5

What are some regulation/competition policy that can increase contestability?

Answer 5

Banning cross subsidisation
Removing legal barriers to entry
Preventing mergers and acquisitions
Reducing protectionist measures