Contestability Flashcards
1
Q
what is a contestable market
A
where there is freedom of entry to industry and where cots of exit are low
2
Q
what makes a perfectly contestable market
A
no sunk costs enabling hit and run entry
3
Q
what is hit and run entry
A
when a competitor is attracted to enter the market and earn supernormal profits but leaves as soon as profits are eroded by competition
4
Q
what are the factors that determine the degree of contestablity
A
-technological change–> can make it easier to start up but can also lead to sunk costs if tech is constantly changing
-sunk costs
-limit pricing–>incumbents can discourage new entrants by keeping prices very low
-evidence of new entrants–>if there have been new entrants it is more contestable
