Contestable Markets Flashcards
What is a contestable market?
It is a market where theres a threat of competition.
What are characteristics of contestable markets?
Low barriers to entry/exit
Large pool of potential entrants
Good information eg: costs, technology
Incumbent firms (already in the market) subject to hit and run competition.
How has technology increased contestability?
Lower barriers to exit/entry. Businesses dont have to be physical so lower startup costs/costs. Also easier to get EoS especially technical. Advertising is also alot easier to help battle brand loyalty.
Increased pool of potential entrants. Tech has allowed for greater innovation so firms can enter and disrupt markets. Tech has also allowed for cheaper ways of production.
Improved information. Information is better due to the developing internet, and communications.
Where do firms in contestable market operate at and why?
They will operate at AC=AR. Also known as limit price.
This is to eliminate threat by decreasing profit potentials.
This is to help prepare if threat becomes real, where the firm can compete due to preparation.
In reality, firms just move closer to AC=AR, rather than being exactly on this point.
What are the pros of contestable markets?
Allocative efficiency.
Resources are following consumer demand, more choices, low prices, high quantities.
Productive efficiency.
Greater EoS exploitation so they can compete. This means lower costs and then lower prices.
X-efficiency.
Minimising waste so they can compete, producing on AC.
Job Creation. This is due to higher quantities meaning more labour needed.
What are the cons of contestable markets?
Lack of dynamic efficiency.
Due to lower profit margins, firms cant invest. No progress overtime.
Cost cutting in dangerous areas. For example, health and safety. This is not desireable.
Creative destruction. New firms with innovative and new things/ideas may destroy firms, leading to job losses.
Anti-competitive strategies. Firms may use things like limit pricing, flooding the market. This means the efficiencies may not last long.
Evaluation for contestable markets.
Length of contestability.
If new firms/existing firms patent their goods/ideas, contestability wont last long. Also if firms use anti-comp strats then it wont last.
Role of tech.
It can reduce contestability if theres a patent or copyright.
Regulation.
May be needed in order to prevent dangerous cost cutting.
Dynamic efficiency.
New firms enter with innovative products/ideas/tech. This can be considered as dynamic efficiency within contestable markets.
