4.5-Contestable markets Flashcards
(37 cards)
What is a contestable market?
A market where there are no barriers to entry or exit, allowing potential competitors to enter easily.
True or False: Contestable markets can have only one firm operating in the market.
True
What is the significance of sunk costs in contestable markets?
Sunk costs are costs that cannot be recovered; they should be low or nonexistent for a market to be contestable.
Fill in the blank: In a contestable market, the threat of __________ can lead to competitive pricing and innovation.
new entrants
What role does ‘hit-and-run’ entry play in contestable markets?
It allows firms to enter the market, make profits, and exit quickly if the market conditions become unfavorable.
Which of the following is NOT a characteristic of contestable markets? A) Low entry barriers B) High sunk costs C) Potential for new entrants
B) High sunk costs
How do contestable markets influence pricing strategies?
Firms may price competitively to deter potential entrants, leading to lower prices for consumers.
True or False: In a contestable market, existing firms have no incentive to limit their output.
True
What is the ‘Baumol’s cost disease’ in the context of contestable markets?
It refers to the phenomenon where firms in contestable markets may face rising costs in providing services despite technological advancements.
What is the implication of zero economic profit in a contestable market?
Firms earn just enough to cover their costs, including opportunity costs, due to the threat of new entrants.
Name one advantage of contestable markets.
They promote efficiency and innovation due to the threat of competition.
What is the relationship between contestability and market power?
Greater contestability typically leads to less market power for existing firms.
Fill in the blank: A market with __________ entry and exit costs is likely to be more contestable.
low
True or False: Contestable markets guarantee the presence of multiple firms at all times.
False
What can existing firms do to deter entry in contestable markets?
They can engage in price cutting or increase advertising to create brand loyalty.
What is ‘limit pricing’?
A pricing strategy where existing firms set prices low enough to make entry unprofitable for potential competitors.
Which market structure is most closely associated with contestable markets?
Oligopoly
True or False: The concept of contestable markets applies only to perfectly competitive markets.
False
What is the primary focus of the theory of contestable markets?
The impact of potential competition on the behavior of existing firms.
Fill in the blank: The __________ hypothesis suggests that the threat of competition can lead to competitive outcomes.
contestability
How does government regulation affect contestable markets?
Regulation can create barriers to entry, reducing market contestability.
What is the ‘Chicago School’ perspective on contestable markets?
They argue that market structures should be analyzed based on their contestability rather than the number of firms.
What is the impact of high barriers to entry on contestable markets?
High barriers reduce contestability, leading to less competitive behavior from existing firms.
True or False: Contestable markets can lead to monopoly outcomes.
True, if barriers to entry are high despite potential competition.
