contestable markets

Question 1

characteristics of a contestable market

Answer 1

• low barriers to entry / exit
• large pool of potential entrants
• good information
• incumbant firms subject to hit an run

Question 2

impact of technology on contestability(3)

Answer 2

• reduces the barriers to entry
• increased info(research and the internet)
• allows to find low production methods for potential entrants

Question 3

why do monopolies move towards AC = AR

Answer 3

• eliminate threats(limit pricing)
• become more allocatively efficient

Question 4

what are the pros

Answer 4

• allocative efficiency
• productive efficiency
• X - efficiency (less complacent with costs)
• job creation(more quantity = more labour)

Question 5

what are the cons

Answer 5

• lack of dynamic efficiency
• cost cutting in dangerous areas
• creative destruction (patents)
• anti competitive strategies(predatory/limit)

Question 6

EVAL points for contestable markets

Answer 6

• length of contestability(patents = no LR contest)
• technology(price discrimination is not allocatively efficient)
• regulation(can minimise pricing strategies)