Th3.4: Sunk Costs and the Degree of Contestability Flashcards
What is a sunk cost?
a fixed cost that a business cannot recover if it leaves the industry - it includes property, machinery and equipment that cannot be sold, and advertising
Why will all businesses face sunk costs?
because even if things are resold it is generally for a lower price
What is the degree of contestability measured by?
the extent to which the gains from market entry for a firm exceed the costs of entering the market
What is a perfectly contestable market?
a market with no sunk costs and no barriers to entry or exit
The more contestable a market…
the more unstable it will be as there can be regular hit and run competition
Why is no market likely to be perfectly contestable in reality?
as there is always likely to be some sunk cost