Contestability pt3

Question 1

Examples of contestable markets

Answer 1

-Fast food industry
-Private education
-Hotel/Room sharing sector

Question 2

Sustaining Innovations

Answer 2

Refers to improvements made to exising products, services or processes that enhances performance within established markets.

Question 3

Disrupting innovations

Answer 3

They are transformative changes that create new markets or transform existing ones by offering better solutions. This challenges established market leaders and traditional business models.

Question 4

Benefits of contestable markets

Answer 4

-The more contestable a market is, the more likely allocative efficiency is achieved
-Smaller disruptive businesses challenge the monopoly power of existing businesses
-The threat of entry affects the behaviour of businesses as firms making supernormal profit are vulnerable to “hit and run” competition

Question 5

Policies to increase contestability

Answer 5

-Deregulation of an industry
-Encouraging international trade
-Tough rules on predatory pricing

Question 5

Legal (Statutory) Entry Barriers

Answer 5

-Market Licenses
-Patent Protection
-Import controls
-State awarded franchises

Question 6

Policies to increase new technology and innovation

Answer 6

-Suitably skilled workforce
-Access to finance
-An entrepreneurial and risk taking attitude
-Confidence that a profit can be earned

Question 7

Benefits of patents for the economy

Answer 7

-Encourages Research and development
-Encourages the use of external EOS e.g. University research
-Innovation is encouraged-higher dynamic efficiency and lower costs for consumers
-Investment in research may benefit society in the long run e.g. external benefits from health research

Question 8

Economic disadvantages of patents

Answer 8

-Allows supernormal profits to be made-transfer of wealth to highly profitable monopolists
-May stifle innovation or competition form others
-Disadvantages of monopoly e.g. loss of allocatively efficiency as prices are are well above MC
-May cause X-Inefficiency due to the lack of contestability

Question 9

Innovation as a barrier to entry

Answer 9

Product innovations may be protected by patent laws and there can be a “first mover” advantage for successful innovators that gives them the chance to exploit some monopoly power.

Question 10

Innovation reducing barriers to entry

Answer 10

Technology may free businesses from a single source of supply, lowering costs.