Th3.4: Sunk Costs and the Degree of Contestability Flashcards
1
Q
What is a sunk cost?
A
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
2
Q
Why will all businesses face sunk costs?
A
because even if things are resold it is generally for a lower price
3
Q
What is the degree of contestability measured by?
A
the extent to which the gains from market entry for a firm exceed the costs of entering the market
4
Q
What is a perfectly contestable market?
A
a market with no sunk costs and no barriers to entry or exit
5
Q
The more contestable a market…
A
the more unstable it will be as there can be regular hit and run competition
6
Q
Why is no market likely to be perfectly contestable in reality?
A
as there is always likely to be some sunk cost
