3.4.7 - Contestability Flashcards
(21 cards)
What Is A Contestable Market?
(2 Points)
~ One where there is a threat of competition or entry.
~ Any attempt to make huge profit will mean other businesses will be attracted to the industry.
What Are The Characteristics Of A Contestable Market?
(5 Points)
~ Low barriers to entry / exit.
~ Large pool of potential entrants.
~ Good information of market conditions.
~ Incumbent firms are subject to hit and run competition.
~ Low sunk costs, due to improved technology.
What Is A Sunk Cost?
A cost that cannot be recovered.
What Is Hit & Run Competition?
New firms enter the market quickly and snatch the supernormal profits and leave the market quickly before incumbent firms react and decrease their profit margins.
How Has Technology Increased Contestability?
(3 Points)
~ Decreased barriers to entry and exit.
~ Increased the pool of potential entrants.
~ Increased information.
How Has Technology Lead To Decreased Barriers To Entry & Exit?
(3 Points)
~ Decreased start up costs.
~ No need to hire workers.
~ EOS and advertising are easy to achieve.
How Has Technology Lead To Increased Pool Of Potential Entrants?
(2 Points)
~ Technology has allowed greater innovation, for firms to enter with.
~ Allowed firms to find cheaper ways to do things.
How Has Technology Lead To Increased Information?
(2 Points)
~ Easier access to information, of market conditions.
~ Better communication.
Draw The Contestability Diagram & Explain It
(2 Points)
~ Monopoly diagram, with SNP being made.
~ If there is a strong threat of entry, monopolist will price where AC = AR (Limit price and normal profit).
Why Do Firm Price At AC = AR, When There Is High Contestability?
(2 Points)
~ Takes away the incentive to enter the market, as there is no SNP being made and profit margins are low.
~ If firms do enter the market, the firm is prepared to compete.
What Are The Benefits Of Contestability?
(4 Points)
~ AE, as price decreases, increased choice and increased consumer surplus.
~ PE, greater exploitation of EOS, decreased costs and price.
~ XE, decreased costs and price, decreased waste.
~ Job creation, as labour is a derived demand.
What Are The Drawbacks Of Contestability?
(4 Points)
~ Lack of DE, due to lower profit margins and no progress overtime.
~ Concerns about cost cutting taking place in the right area.
~ Creative destruction, new firms enter means more innovation destroys incumbent firms.
~ Anti-competitive strategies.
How Can You Evaluate Contestability?
(4 Points)
~ Length of contestability, patents and anti-competitive strategies decrease contestability.
~ Role of technology, can increase the degree of contestability.
~ Regulation, minimises anti-competitive strategies.
~ DE.
What Is A Barrier To Entry?
(2 Points)
~ Any obstacle that prevents a new firm entering a market.
~ Lloyds TSB.
What Are All The Types Of Barriers To Entry?
(4 Points)
~ Legal.
~ Technical.
~ Strategic.
~ Brand loyalty.
Describe The Legal Barriers To Entry
(5 Points)
~ Patents.
~ Licenses and permits.
~ Red tape.
~ Insurance.
~ Excessive standards and regulations.
Describe The Technical Barriers To Entry
(4 Points)
~ High start up costs.
~ High sunk costs.
~ EOS, low cost scare off new firms.
~ Natural monopolies.
Describe The Strategic Barriers To Entry
(3 Points)
~ Predatory prices.
~ Limit price, pricing at (AR = AC).
~ Heavy advertising.
Describe The Brand Loyalty Barriers To Entry
Consumers are loyal to different businesses when you enter a market.
What Are Barriers To Exit?
Any obstacle that prevents a firm leaving a market.
What Are The 3 Barriers To Exit?
(3 Points)
~ High redundancy costs.
~ Penalties for leaving contracts early.
~ Sunk costs.
