Contestability Flashcards
(7 cards)
1
Q
What are the characteristics of contestable markets?
A
- Low barriers to entry and exit
- No sunk costs
- Equal access to technology (existing firms don’t have an advantage)
- No collusion
- Weak brand loyalty
2
Q
Sunk Costs
A
Costs that can’t be recovered if a firm leaves an industry
3
Q
What are the implications of contestable markets on the behaviour of firms?
A
- Limit pricing
- Non price competition
- Innovation
4
Q
Limit Pricing
A
A firm sets its price low enough to deter new entrants (AR=AC)
5
Q
Hit and Run Entry
A
When a business enters an industry to take advantage of temporarily high (supernormal) profits.
6
Q
What are the types of barrier to entry and exit?
A
- Economies of scale
- Legal barriers (patents and copyright)
- Ownership of resources essential to production
- Anti-competitive resources (predatory pricing, limit pricing)
7
Q
What is the impact of high sunk costs on contestability?
A
It will limit competition and decrease contestability, as firms will be more hesitant to enter.
