Contestability

Question 1

Define what a contestable market

Answer 1

A market structure where it is easy for firms to join the market and compete

Question 2

Characteristics of a contestable market

Answer 2

-Perfect knowledge
-No barriers to entry
-No brand loyalty
-No collusion
-prescence of “hit and run” competition

Question 3

Describe hit and run competition

Answer 3

When new firms see that there are supernormal profits to be made, they will join that market then leave once they are satisfied with their returns.

Question 4

Types of barriers to entry and exit

Answer 4

1.Legal barriers:
-Patents
-Copyrights

2.Sunk costs

3.Economies of scale

4.Brand loyalty

Question 5

Define and give examples of sunk costs

Answer 5

Costs that cannot be recovered once they are made

-Advertising/Branding
-Research & development
-Specialist Machinery