Contestability pt2

Question 1

Hit and run entry

Answer 1

When a business enters an industry to take advantage of temporarily high market profits

Question 2

Sunk costs

Answer 2

These are costs that cant be recovered if a business leaves an industry. This makes markets less contestable.

Question 3

Sunk costs explained

Answer 3

-High sunk costs act as a barrier to entry of new firms because they risk making significant losses is they exit.
-In markets, such as fast food restaurants, they have low sunk costs so barriers to exit are low and contestability is high

Question 4

Core examples of sunk costs

Answer 4

-Asset write offs e.g. writing off the value of machinery
-Closure or project cancellation costs including redundancy costs, bad debts and more
-Loss of business reputation and goodwill

Question 5

Key barriers to market contestability

Answer 5

-Internal EOS
-Strength of customer brand loyalty
-Control of important technologies
-Expertise and reputation
-Vertical integration

Question 6

What is vertical intergration

Answer 6

When a company takes control of more than one stage of its production or supply chain. Instead of relying on other companies for materials, production and distribution, the company does it itself

Question 7

Strengths of vertical intergration

Answer 7

This helps businesses improve efficiency, reduce costs and have greater control of their products and services.

Question 8

Cost advantages of established businesses

Answer 8

A firm may have a big cost advantage of established businesses due to vertical integration, higher customer loyalty, monopsony power and more.

Question 9

What is monopsony power

Answer 9

This occurs when there is only one buyer in the market, giving them significant control over the prices and the terms of purchase from suppliers.