Contestability

Question 1

Characteristics of Contestable Markets 2

Answer 1

Freedom of entry and exit

Perfect knowledge

Low product loyalty

Question 2

Implications of contestable markets 2

Answer 2

Potential entrants can freely enter and leave, can operate ‘hit and run’ strategy Just the threat of entry is enough to ‘keep firms on their toes’, to the extent that existing firms behave ‘as if’ the market has a highly competitive market structure.

Question 3

Contestability Diagram

Answer 3

Question 4

Contestability Regulation Example

Answer 4

Contestable market theory has clearly influenced the views and methods of regulators. Opening up a market to potential entrants may be sufficient to encourage efficiency, and deter anti-competitive behaviour. e.g. regulators may force incumbents to open-up their infrastructure to potential entrants – as in the case of broadband operators being allowed to use British Telecom (BT Openreach) infrastructure