Contestable markets Flashcards
Contestable market
A market where new entrants/firms can easily enter and compete with established firms, even if those firms have significant market share
Incumbents
Established/existing firms in a market
What does the threat of new competitors/firms do in a contestable market?
The threat of new competitors/firms entering the market keeps existing firms on their toes, spurring them to be more efficient and competitive and ultimately leading to lower prices and better products for consumers(lower profits aren’t as attractive for new entrants)
Examples of barriers in contestable markets
Product differentiation, leads to brand loyalty, which enhances confidence the new entrants can’t come in(brand loyalty may entitle you for copyright, so no other firms can replicate your products)
Key idea in a contestable market
If entry into the market is relatively easy and exit is not costly(no worrying about sunk costs), even a monopoly or a small number of dominant firms will act as if they’re in a highly competitive environment
Examples of entrants in a contestable market
Metro Bank only emerged a few years ago as a new entrant to the banking system, but the banking system has already had other existing firms on the High Street, therefore the banking system could be seen as a contestable market.
“Hit and run”
An entrant coming into the market, grabbing profit and then exiting. Contestable markets are vulnerable to this, due to low barriers of entry/exit.
Contestable market
Where a new market entrant has equal access to all production techniques available to the incumbents, and where entry decisions can be reversed without cost. Market entrants don’t have to worry about sunk costs
Contestable market main characteristics
Absence of sunk costs(firms go in to a market, take money and get out)
Equal access to technology
Weak brand loyalty(if there’s no strong brand loyalty, customers are willing to switch easily)
Low barriers to entry
Freedom of exit
Perfect information
Fear of entrants(due to existing firms wanting to continue to earn supernormal profits)
Low barriers to entry in a contestable market
New firms can easily enter and start operating without facing significant obstacles. Barriers can include high startup costs, limited access to resources, regulatory restrictions and technological entry barriers.
Freedom of exit in a contestable market
Without incurring substantial costs or losses - firms can withdraw from the market if conditions become unprofitable without suffering excessive financial harm
Perfect information(contestable market)
For market participants, including potential entrants - information covering market conditions, prices and the strategies of existing firms, allowing firms to make informed decisions
No sunk costs(contestable market)
Sunk costs should be minimal or non-existent, reducing the risk associated with entering the market and making it easier for potential entrants to consider market entry
What can be used to increase brand loyalty?
Loyalty cards(in shops)
Sunk costs-
Costs that can’t be recovered if a business decides to leave an industry
