Contestability Flashcards

1
Q

Contestability

A

How open a market is to new competitors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Characteristics of a contestable market

A
  • Perfect knowledge
  • Free entry and exit
  • All firms have the same AC as there are low sunk costs and easy access to technology
  • Low product loyalty
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Examples of contestable markets

A
  • AirBnB
  • Five Guys
  • Uber
  • Ocado
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How does vertical integration affect contest ability

A

If a firm has access to the supply of a good then the market becomes less contestable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Why is limit pricing used in contestable markets

A

Incumbent firms charge prices much lower than the profit maximisation even at a loss to deter fringe firms from entering the market, as if these firms entered the market they would take profits off of incumbent firms

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How efficient are firms in contestable markets

A

Tend to be statically efficient as they can only make normal profits in so produce at AC/MC=AR so are allocative efficient and they are productive efficient as they produce at the lowest AC point to stop new firms undercutting them with a lower AC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Innocent entry barriers

A

Ones that occur naturally like high sunk costs or a natural monopoly

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Types of barriers to entry

A
  • Legal Barriers
  • Marketing Barriers
  • Limit and predatory pricing
  • High sunk costs
  • Economies of scale for large incumbent firms allow low AC
  • Trade restrictions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Marketing Barriers

A

High levels of advertisement build up customer loyalty so the entry of new firms isnt a threat to incumbent ones

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Legal Barriers

A

Laws that make entry harder or impossible like patents to production or licenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Sunk cost

A

fixed cost that can never be recovered

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How is degree of contestability measured

A

Extent to which the gains from market entry outweigh the sunk costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Hit and Run tactics

A

Entering a market when supernormal profits can be made and then leaving once profits have been driven down to normal profits resulting in a net gain over the sunk costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How can technological change increase contestability

A

New technology can help put incumbent firms out of business in creative destruction, it may destroy old markets but create new more advanced ones

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Reasons for increased contestability nowadays

A
  • Sunk costs are lower as many markets are digital and operate purely online
  • Globalisation has allowed foreign firms to enter markets
  • Predatory Pricing and cartels now illegal
  • Recession provided new opportunities like Aldi and Lidl
How well did you know this?
1
Not at all
2
3
4
5
Perfectly