3.4.7 Contestability Flashcards
(11 cards)
What is contestability?
Contestability ia how easy it Is for firms to enter and exit a market, based on barriers
What are the key features of a contestable market?
Low barriers to entry/exit
Low sunken costs
Access to technology
No brand loyalty
Hit-and-run possibility
What are sunken costs?
Irrecoverable costs if a firm leaves the market (rented equipment rather than bought)
What is hit-and-run competition?
Entry when supernormal profits exist, followed by a quick exit once profits fall avoiding firms already in the market from retaliating
What keeps the firms acting competitively in a market?
Not actual competition, but the threat of new entrants
What causes the contestability of markets to differ?
Regulation
Technology
Access to finance
Brand loyalty
Sunken costs
What is normal profit?
Minimum profit ended to keep resources in their use (covers opportunity cost)
What is supernormal/abnormal profit?
Profit above normal profits attract new entrants if the market is contestable
What are the barriers to entry/exit?
High capital requirements
Regulation
Economies of scale
Advertising
Brand loyalty
Sunk costs
How do contestable markets influence firms behaviour?
Increased efficiency
Limit pricing
Lower profits in the long run
Incentives to innovate
What is limit pricing?
Setting prices low enough to make the market less attractive to new entrants
