5.9 contestability

Question 1

What is contestibility?

Answer 1

measures the degree to which a market is open to potential competition

Question 1

What are the characteristics of contestable markets?

Answer 1

1)freedom of entry and exit
2) a credible threat of potential entrants
3)hit and run competition

Question 2

What is an example of a contestable market?

Answer 2

Ride-sharing apps such as Uber and Lyft have increased competition in the taxi industry.

Question 3

How does contestibility affect the performance of an industry?

Answer 3

1)greater incentive satisfy consumer preferences (dynamic efficiency and investment
2)anti-competitive practices

Question 4

How might a firm erect barriers to entry with supernormal profit?

Answer 4

invest in specialised technology, increase range

Question 5

How does limit pricing drive out inefficient firms?

Answer 5

undercutting the prices of other firms in the market, causing them to lose out on profits and thus leave the market if they cannot reduce costs

Question 6

What are the benefits of limit pricing?

Answer 6

economies of scale/productive/allocative efficiency

Question 7

what is hit and run competition?

Answer 7

when firms enter a market and make high profits until it is competed away, then exit the market

Question 8

what is a contestable market?

Answer 8

one which is susceptible to new entrants which challenge existing firms due to low barriers to entry and low sunk costs.