contestable markets Flashcards
What are contestable markets?
a market in which existing firms Makes only normal profits as can’t set a price higher than AC without attracting entry, owing to the absence of barriers to entry
What is hit and run entry?
new firms enter the market, compete away the SNP then leave
What are the characteristic of a perfectly contestable market
1) Low barriers to entry
2) many firms
3) productive and allocative efficiency
4) threat of predatory pricing
5) short run SNP, long run normal profit
How do perfectly contestable markets compare to monopolistic competition
- they give the same benefits without the need for large number of firms
- threat of increased competitor has the same impact on incumbent firms as actual competition
examples of perfectly contestable markets
fast food, parcel delivery, hotel
How is a long run perfectly contestable market shown o a P/C/R diagram??
AR and MR slope down
AC crosses MC at lowest point as well as crossing AR at the same point due to sales maximisers
What objective does contestable market firms hold and why??
sales volume maximisation, which is allocatively efficient and where MC=AR. They can’t put prices above AC due to the threat of competition and hit and run entry
what efficiencies does contestable markets hold??
Allocative MC=AR
productive- lowest point of AC
ADV and DISADV of contestable markets?
ADV
-static efficiency through productive and allocative efficiency, threat of competition leads to lower prices
DIS ADV- equal access to technology reduces dynamic efficiency
-Lack of SNP reduced dynamic efficiency
Why contestable markets are useful and not useful
useful
-characteristics of perfectly contestable markets gives actionable advice to the government on how to improve the functioning of the market to benefit consumers with higher output and lower prices
not useful- the assumptions are almost as unrealistic as perfect competition
