Contestability

Question 1

What is the definition of contestability?

Answer 1

A measure of ease with which firms can enter or exit an industry

Question 2

What is a contestable market?

Answer 2

A market that has low sunk costs and therefore low barriers to entry and exit , therefore making it easier for new firms to enter the market

Question 3

What are examples of contestable markets?

Answer 3

Lending, renting, tutoring, fast food

Question 4

What is a perfectible contestable market?

Answer 4

Only occurs if there are no sunk costs and no barriers to entry or exit

Question 5

What are the behaviours of firms in contestable markets?

Answer 5

Predatory pricing, limit pricing, brand loyalty=> increase market share

Question 6

What are the features of firms with high contestability?

Answer 6

low sunk costs, low barriers to entry, low concentration ratio, low supernormal profits, new firms joining frequent, collusive activity is rare

Question 7

What are features of firms with low levels of contestability?

Answer 7

high sunk costs, high barriers to entry/exit, high concentration ratio, supernormal profits, rare, frequent

Question 8

What are the positives of a contestable market?

Answer 8

High productive efficiency, dynamic efficiency, low prices for consumers, consumer choice, economies of scale, low sunk costs, high consumer utility, increased consumer surplus

Question 9

What are the negatives of contestable markets?

Answer 9

Uncertainty ease of exit , low dynamic efficiency due to snp decreasing, price takers, reduced producer surplus, affects consumer, slower product innovation, hit and run competition, meaning no guarantees for consumers

Question 10

What is hit and run competition?

Answer 10

hen firms enter and exit the market quickly, selling their product for a short period of time and then leaving