[4.1.2] Barriers to Entry Flashcards
1
Q
Name 4 or 5 characteristics of a contestable market
A
Main 4 characteristics:
- absence of sunk costs (key aspect)
- access to technology/FoPs
- weak loyalty
- low barriers to entry (and/or exit)
Others:
- no natural monopoly
- contestable markets face actual and potential competition
- number of firms within a contestable market varies
- prices cannot be set above average costs as supernormal profits will attract ‘hit and run’ competition to enter the market
2
Q
Name some examples of contestable markets
A
- fast food industry
-
3
Q
What are the three main conditions for pure market contestability?
A
- perfect information (and the ability/right of all suppliers to make use of the best available production technology in the market)
- the freedom to market/advertise and enter a market with a competing product
- the absence of sunk costs - this reduces the risks of coming into the market
4
Q
What are the implications of contestable markets
A
- firms might become allocatively inefficient (MC=MU)
- ## the threat of competition affect firms just as much as exists competition
5
Q
Name some examples of barriers to entry
A
- patents (Legal)
- brand loyalty & reputation (natural)
- licences and permits (Legal)
- high specialist machinery
- economies of scale (natural)
- marketing costs (artificial)
6
Q
Types of barriers to entry
A
- legal (intellectual property rights, patents, trademarks, copyrights, regulation)
- natural (brand loyalty, geographical barriers, and economies of scale)
artificial (predatory pricing, product differentiation, branding, R&D, predatory/limit pricing)
7
Q
Impact of barriers on entry to a market
A
- shifts markets away from being perfectly competitive (less contestable/lower concentration ratio)
- “x-inefficiencies” can happen when there is a lack of effective/real competition within an industry - AC is higher than they would be with competition (little/no incentive) - satisfying, patents, rising wages etc
