Contestability Flashcards
What is the definition of contestability?
A measure of ease with which firms can enter or exit an industry
What is a contestable market?
A market that has low sunk costs and therefore low barriers to entry and exit , therefore making it easier for new firms to enter the market
What are examples of contestable markets?
Lending, renting, tutoring, fast food
What is a perfectible contestable market?
Only occurs if there are no sunk costs and no barriers to entry or exit
What are the behaviours of firms in contestable markets?
Predatory pricing, limit pricing, brand loyalty=> increase market share
What are the features of firms with high contestability?
low sunk costs, low barriers to entry, low concentration ratio, low supernormal profits, new firms joining frequent, collusive activity is rare
What are features of firms with low levels of contestability?
high sunk costs, high barriers to entry/exit, high concentration ratio, supernormal profits, rare, frequent
What are the positives of a contestable market for firms?
High productive efficiency, dynamic efficiency, consumer choice, economies of scale, low sunk costs
What are the negatives of contestable markets for firms?
Uncertainty ease of exit , low dynamic efficiency due to snp decreasing, price takers, reduced producer surplus, slower product innovation, hit and run competition
What is hit and run competition?
hen firms enter and exit the market quickly, selling their product for a short period of time and then leaving
What are the positives of contestable for consumers?
low prices for consumers, high consumer surplus , consumer utility
What are negatives of contestable markets for consumers and individuals?
job insecurity, low quality, no consumer loyalty
Rank the level of contestability of market structures (lowest to highest)
perfect competition , monopolistic competition, oligopoly , natural monopoly , pure monopoly
