8. Market Structures - Contestability of Markets

Question 1

What are contestable and non-contestable markets?

Answer 1

Contestable = Markets that have a threat of competitionNon-Contestable = Markets that don’t have a threat of competition

Question 2

What are the features of perfectly contestable markets?

Answer 2

No entry/exit barriersPool of potential entrantsPerfect InformationExisting firms in the market vulnerable to ‘hit & run’ competition - firms get in and out quickly grabbing some SNP

Question 3

What are the consequences of a monopoly industry becoming contestable?

Answer 3

SNP wld attract loads of firms (no entry/exit barriers)So monopolist thinks I will reduce SNP so as not to attract new entry - reduce profits to normal profits (AR=AC) - called the entry limit price

Question 4

What are the evaluation points for contestable markets?

Answer 4

More contestable = more competitive market outcomes - positivePrice driven down, Quantity upAllocative and potentially productive efficiency createdIncrease in consumer surplusBUT;we lose some of the dynamic efficiency stemming from SNP