contestability Flashcards
(17 cards)
What is a contestable market?
A contestable market is one where there is a threat of competition, not necessarily actual competition.
What are the three fundamental characteristics for a strong threat of competition in a market?
- Low barriers to entry and exit
- A large pool of potential entrants
- Good information about market conditions
What does ‘hit and run competition’ refer to?
Hit and run competition refers to new firms entering the market quickly to snatch supernormal profits and then leaving before incumbent firms can react.
How has technology increased the contestability of markets?
- Reduced barriers to entry and exit
- Lower startup costs
- Easier achievement of economies of scale
- Simplified advertising and overcoming brand loyalty
What is the significance of perfect information in a perfectly contestable market?
Perfect information means that all firms have complete knowledge about costs and technology, enabling fair competition.
What is a limit price in economics?
A limit price is where a monopolist prices their product to deter entry by potential competitors, aiming for normal profit.
What are the benefits of movements towards competitive outcomes in a contestable market?
- Allocative efficiency
- Productive efficiency
- X efficiency
What does allocative efficiency imply?
Allocative efficiency implies lower prices, higher consumer surplus, and greater choice in the market.
What is dynamic efficiency?
Dynamic efficiency refers to the improvement and innovation over time, which may be limited due to lower profit margins.
What are potential issues with contestable markets?
- Lack of dynamic efficiency
- Cost-cutting potentially affecting safety and standards
- Creative destruction leading to job losses
- Anti-competitive strategies
True or False: A monopolist will always maintain supernormal profits in a contestable market.
False
What role can regulation play in contestable markets?
Regulation can minimize issues of cost-cutting in dangerous areas and prevent anti-competitive strategies.
Fill in the blank: The threat of competition can lead firms to reduce their profit margins to _______.
[limit price]
What is the importance of the length of contestability in a market?
The length of contestability determines how long the market can remain competitive, affected by patents and anti-competitive strategies.
How can technology both increase and reduce contestability?
Technology can increase contestability by lowering barriers but can also reduce it through patents and copyrights.
What are first-degree and third-degree price discrimination?
Price discrimination strategies where firms charge different prices based on consumer willingness to pay, potentially reducing static efficiency benefits.
What is the derived demand for labor in the context of contestable markets?
Labor is a derived demand because higher quantity in the market can lead to more jobs being created.
