Contestable markets

Question 1

What is a contestable market?

Answer 1

A contestable market is one in which the potential for competition leads firms to act in similar ways to if they were in perfect competition

Question 2

Characteristics of a contestable market

Answer 2

no entry barriers
no sunk costs
no costumer loyalty
equal access to technology

Question 3

Key aspect of a contestable market?

Answer 3

The EASE by which new firms can enter the market

Question 4

Aspect of a highly contestable market

Answer 4

There is the risk of “hit and run” competition

Question 5

What is “hit and run” competition?

Answer 5

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

Question 6

To what extent will a contestable market lead to higher economic efficiency?

Answer 6

Allocative efficiency - lower prices
X-EFFICIENCY - incentive to cut costs
Dynamic efficiency - incentive to innovate
Scope for economies of scale

Question 7

Evaluation of contestable markets?

Answer 7

Might lead to limit or predatory pricing

Question 8

Limit pricing

Answer 8

artifically creating barriers to entry
deter entry
below the AC of rivals so no pricing signals

Question 9

Predatory pricing

Answer 9

Selling below AC
reduce competition
can be used by incumbent and entrant
lead to monopoly power in the LR

Question 10

Is predatory pricing illegal

Answer 10

YES under EU competition law