Market Structures - Contestable markets

Question 1

How many firms are likely to exist in a contestable market?

Answer 1

Any number is possible

Question 2

What are the products available to the consumer in a contestable market like?

Answer 2

Differentiated products are a key part of non-price competition

Question 3

Are there significant barriers to entry in a contestable market?

Answer 3

No- in a contestable market entry and exit costs are low

Question 4

How strong is the pricing power of firms in a contestable market?

Answer 4

Depends on the degree of actual competition and the threat of new competition

Question 5

What is the potential to earn super normal profit in the long run like in a contestable market?

Answer 5

Low if the market is highly contestable- new firms may be able to enter and make supernormal profits

Question 6

Are firms in a contestable market likely to be allocatively efficient?

Answer 6

Yes - the strength of competition is likely to encourage firms to price competitively

Question 7

Are firms in a contestable market likely to be productively efficient?

Answer 7

Yes - high-competitive pressures likely to get firms to control their costs

Question 8

Describe the likely rate of dynamic efficiency in contestable markets?

Answer 8

The rate of dynamic efficiency is likely to be high as firms have to innovate to outcompete rival firms.

Question 9

How can firms in a contestable market try and discourage new firms from entering the market?

Answer 9

They can temporarily drop their prices so that they only make normal profit (break even).

Question 10

What is a contestable market?

Answer 10

A contestable market exists when there is
freedom of entry and exit into an industry and there are limited or no sunk costs of production.