Contestability

Question 1

A contestable market is Open to New Competitors

Answer 1

1. Contestability refers to how open a market is to new competitors even if currently there’s little actual competition.
   a, b
2. …..
   3…..

Question 2

High Barriers to Entry or Exit mean Low Contestability

Answer 2

Its low barriers to entry that make potential competition a genuine threat to incumbent firms. So anything that makes the barriers higher makes a market less contestable. Barriers to entry are high if:
1. 2. 3. 4. 5. 6.

Question 3

Hit-and-Run tactics can be used in contestable markets

Answer 3

1. The low barriers to entry and exit in a contestable market can mean that new entrants will ‘hit and run’
   ….
   2.

Question 4

The contestability of a market affects the behaviour of incumbent firms

Answer 4

1. In a contestable market, its the threat of increased competition that affects how incumbent firms behave. E.g. incumbent firms will know that high supernormal profits are likely to attract new entrants, and that these new entrants are likely to drive down prices
2. might make sense for incumbent firms to sacrifice short-term profits, and set lower prices to avoid attracting new entrants. Best way to maximise profit in the long run.
3. Incumbent firms creating high barriers to entry if they can
4. ,…… advertising
5. …….. contestable markets move towards productive and allocative efficiency

Question 5

Technological Change can have a Big Impact on a Markets structure

Answer 5

1. barriers to entry
2. occurs through invention and innovation
3. Technologial change can impact:
   - structure of market
   - production methods
   - consumption of goods and services
4. Invention and innovation can lead to:
   - improvements in capital equipment => improvements in the quality of goods produced, barriers to entry into a market, but increases in the levels of capital required to produce the latest products may increase barriers to entry
   - a level of monopoly power for the first firm - utilises new invention or innovation
   - improvements in labour productivity and efficiency, e.g. due to more effective machinery,
   - larger economies of scale

Question 6

New Technology can also lead to Creative Destruction

Answer 6

1. Creative destruction is an important process in a market economies. It’s the idea that markets are constantly evolving and changing due to innovation and the invention of new products and production methods. etc….
2. Destruction of existing markets causes job losses, but in the long run, new jobs will be created in the new markets and society benefits from the improvement
3. Technological change likely to => creative destruction … look at example on page 75
4. In this way, technological change => firms being put out of business. Even big firms that seem unchallengable are vulnerable to changes in technology, as innovative new entrants will be attracted to markets where large supernormal profits are being made. => incentive to keep inventing and innovating to keep barriers to keep barriers to entry high.