Contestable markets Year 2

Question 1

Contestable market

Answer 1

where an entrant has access to all production techniques available to incumbents and entry decisions can be reversed without cost

Question 2

Hit and run entry

Answer 2

when a business enters an industry to take advantage of temporarily high (supernormal) market profits and leaves before the incumbents respond with lower pricing

Question 3

Sunk costs

Answer 3

sunk costs cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes the market less contestable.

Question 4

entrants to contestable market have free ….

Answer 4

access to production techniques and technology

Question 5

There is no/low..

Answer 5

• consumer loyalty
• sunk costs
• barriers to entry or exit

Question 6

Which efficiency can contestable markets achieve? How about the long run and why?

Answer 6

allocative efficiency

In LR: productively efficient as firms operate at the bottom of the AC curve

Question 7

highly contestable markets act similar to perfectly competitive markets. WHY?

Answer 7

Bc existing firms acts as though there is a lot of competition due to risks in hit and run entry

Question 8

Types of barriers to entry or exit (draw into oligopolies and monopoly strategies)

Answer 8

• greater economies of scale by existing firms (relatively cheaper to entrants)
• Legal barriers i.e. patents, exclusive rights to production
  (Taxi industry gain market licences to operate, barrier to new entrants - need licence)
• Consumer loyalty and branding
  (demand becomes more price inelastic - less likely to try new - such as ‘Henry’ with vacuum cleaners)
• Predatory pricing
  (set price below AC in SR)
• Limit pricing
• Anti-competitiveness practices
• Vertical integration
  (one firm gains control of more of the market e.g. gaining control of important technologies, supplies)