Contestable Markets Flashcards
What is a contestable market ?
Contestable in economics means that a company can be challenged or contested by rival companies looking to enter the industry or market
What are some characteristics of a contestable market
- Low barriers to entry and exit
- Access to all available technology
- Absence of sunk costs
- Low rate of existing consumer loyalty
What are sunk costs ?
Sunk costs cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contestable
How do sunk costs effect barriers to the market
Sunk costs can increase or decrease market competition depending on how high or low the sink costs are.
E.g. A business with low sunk costs such as a window cleaning business will have lots of competition as lots of people can enter the market
List some contestable markets in action
Peer to peer lending
Fast food industries
Hotel / room sharing sector
City transport services
Private education
Bookselling
What is hit and run entry ?
When a firm enters an industry to take advantage of supernormal market profits
What is predatory pricing ?
When a firm lowers their price to prevent new firms from entering or staying in the market
Where will you find
- Maximum profit
- Maximum output
- Maximum revenue
Profit - MC = MR
Output - AC = AR
Revenue - MC = AR
