Contestable And Non-Contestable Markets Flashcards
What isn’t considered important within a contestable market
The number of firms and size distribution of firms
What is more focus on within contestable markets
Credible threat of entry from rivals
Are all markets contestable?
Yes - to a degree
Example of contestable markets
Fast food industries
4 key conditions for a contestable market
- Pool of new businesses who are ready to enter the market
- No entry / exit costs
- Access to technology
- Consumers are willing to change suppliers
Contestability of a market with high sunk costs
Less contestable
What do high sunk costs act as
A barrier to entry of new firms because they risk making significant losses if they decide to exit the sector
What are asset write offs
Wiring off the value of a machine etc
What are closure or project cancellation costs
Costs from ending leases / debts etc
What is a hit and run entry
When a business enters an industry to take advantage of temporarily high (supernormal) profits
Allocative efficient and contestable markets
The more contestable, the more likely than an allocatively efficient outcome is achieved
What firms are vulnerable to hit and run competition
Firms making super normal profits
What does a highly contestable market resemble
Perfect competition - regardless of the number of firms, since incumbents behave as if there were intense competition
Where is price and output likely to be in a contestable market
Somewhere between the profit-maximising and normal profit equilibrium. The more contestable the market, the higher the likelihood that price will be closer to normal profits only.
