3.4.7- Contestability

Question 1

What is a contestable market?

Answer 1

One with a high threat of new entrants, which keeps firms producing at a competitive level

Question 2

What are the characteristics of a contestable market?

Answer 2

-perfect knowledge
-low barriers to entry and exit
-any level of competition
-any number of firms
-SNP earned by incumbent firms
-independent decision makers

Question 3

What is an example of a contestable market?

Answer 3

Taxi industry

Question 4

What is the behaviour of firms like in contestable markets?

Answer 4

-hit and run tactics
-invest in highly flexible capital and workforce
-spending on market research
-operating at MES

Question 5

What are hit and run tactics?

Answer 5

Enter a contestable market by undercutting existing firms, stay until all firms are producing at MC=AR, then move on to maximise SNP

Question 6

What is MES?

Answer 6

Minimum efficient scale, where costs are minimised

Question 7

Who are incumbent firms?

Answer 7

Firms already in the market

Question 8

What are some ways to increase contestability?

Answer 8

-gov regulation to prevent ACB
-demergers
-gov provides short term leasing of infrastructure
-deregulation
-subsidised technology that increases flexibility of capital

Question 9

What are some ways to decrease contestabilty?

Answer 9

-patents for crucial components
-high levels of advertising
-pricing decisions of incumbent firms

Question 10

What is the degree of contestability?

Answer 10

The extent to which gains from market entry for a firm exceed the costs of entering the market

Question 11

What is an example of the effects of contestability for search engines?

Answer 11

AskJeeves were the incumbent search engine, then the internet brought more contestability so competition from Google, Yahoo, and Bing entered

Question 12

What is an example of a firm being forced to demerge to improve contestability?

Answer 12

BT had to break up infrastructural operations and provide its demerged service Openreach in 2017 in the UK Broadband market

Question 13

What is a firm that disrupted the hotel businesses?

Answer 13

Airbnb, dropped hotel occupancy rates by 3% since 2011

Question 14

What is an example of creative destruction?

Answer 14

Netflix’s streaming service led to the demise of Blockbuster

Question 15

What is the market concentration of UK food delivery market?

Answer 15

Deliveroo= 40%
Uber= 30%

Question 16

What is an example of deregulation and privatisation leading a monopoly to turn into an oligopoly?

Answer 16

Privatisation of royal mail in 2013 led to more competition from Hermes, Yodel, DHL, and Amazon Logistics