3.4 - Contestability Flashcards
What are the characteristics of a contestable market?
Low barriers to entry/exit
Allows new entrants to compete
What are the required conditions within a contestable market?
Pool of willing business entrants
No significant entry/exit costs
Equal access to tech + capital
Low brand loyalty/High rates of switching
What are the general implications to firms?
Lower prices
Higher output
Where does the optimal price/output lie in a contestable market?
Between Qpm and Normal equilibrium
What are profit maximising firms vulnerable to?
Hit and run competition
New entrants undercut prices
Earn normal profit
What is the limit price in a highly contestable market?
Normal equilibrium
Normal profit
No entry incentive
Why do many firms choose not to profit maximise in contestable markets?
Normal profits discourage new entrants
Lowers vulnerability to losses
Competition less fierce
What are barriers to entry?
Ways in which firms with market power can prevent profitable new entrants
Give 3 examples of barriers to entry
EoS
Vertical Integration
Brand loyalty
Control of technology
Expertise + Reputation
What is strategic entry deterrence?
Existing firms make entry difficult/impossible
Give 3 forms of strategic entry deterrence
Hostile takeovers/acquisitions
Product differentiation
Capacity expansions
Predatory pricing
What are sunk costs + their relation to contestability?
Costs which cannot be recovered
Absence is key in contestable market
Give 3 examples of sunk costs
Asset write offs
Closure/Cancellation costs
Loss of reputation
What do closure costs usually consist of?
Unfinished contracts
Redundancy
Ending leases early
How can regulation/policy increase contestability?
Banning cross subsidisation
Removing legal entry barriers
Preventing mergers + acquisitions
Reducing protectionist measures
