Contestable markets Flashcards

1
Q

What is a contestable market

A

Low barriers to entry/exit, so threat of competition is high

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2
Q

Assumption for constesable markets

A

Normal profit in long run

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3
Q

Hit and run competition

A

If a firm is making SNP in short run, new entrants will enter and undercut as low barriers to entry. Price falls until =AC and then firms ‘run’ with low barriers to exit.

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4
Q

How technology has increased contestability

A

Lowered barriers e.g online, reduced start up costs
More entrants
Information e.g find out costs and revenues

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5
Q

Contestability diagram

A

Normal cost/rev diagram, moves closer to sales max (limit price) to reduce threat

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6
Q

Pros cons of contestable markets (3,2)

A

More A.E
More P.E
X-efficient

Lack of D.E EVAL:new firms entering with new ideas can be D.E
Could lead to cost cutting in dangerous areas e.g health safety

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