Contestable And Non-Contestable Markets Flashcards

1
Q

What isn’t considered important within a contestable market

A

The number of firms and size distribution of firms

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2
Q

What is more focus on within contestable markets

A

Credible threat of entry from rivals

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3
Q

Are all markets contestable?

A

Yes - to a degree

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4
Q

Example of contestable markets

A

Fast food industries

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5
Q

4 key conditions for a contestable market

A
  1. Pool of new businesses who are ready to enter the market
  2. No entry / exit costs
  3. Access to technology
  4. Consumers are willing to change suppliers
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6
Q

Contestability of a market with high sunk costs

A

Less contestable

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7
Q

What do high sunk costs act as

A

A barrier to entry of new firms because they risk making significant losses if they decide to exit the sector

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8
Q

What are asset write offs

A

Wiring off the value of a machine etc

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9
Q

What are closure or project cancellation costs

A

Costs from ending leases / debts etc

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10
Q

What is a hit and run entry

A

When a business enters an industry to take advantage of temporarily high (supernormal) profits

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11
Q

Allocative efficient and contestable markets

A

The more contestable, the more likely than an allocatively efficient outcome is achieved

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12
Q

What firms are vulnerable to hit and run competition

A

Firms making super normal profits

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13
Q

What does a highly contestable market resemble

A

Perfect competition - regardless of the number of firms, since incumbents behave as if there were intense competition

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14
Q

Where is price and output likely to be in a contestable market

A

Somewhere between the profit-maximising and normal profit equilibrium. The more contestable the market, the higher the likelihood that price will be closer to normal profits only.

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