contestable. Markets Flashcards
Contestable markets are characterized by "hit and run" competition; if a firm in a contestable market raises its prices so as to begin to earn excess profits, potential rivals will enter the market, hoping to exploit the high price for easy profit. (12 cards)
What is a contestable market
market where there are low barriers to entry and exit meaning firms can enter. And leave easily making incumbenent firms behave competitive
Allocatovely efficient in a contestable market
firms reduce prices and increase output to deter potential competition ensuring resources are allocated according toconsumer demand maximizing consumer surplus
How does contentestable market produce productive efficiency
firms produce closer to minimum ac curve fo remain competitive benefiting from economies of scale and reducing costs for consumers
x inefficiency and how does contestability encourage it
when firms mimize wste and inefficnecy to remain competitive the threat of competition forces firms to keep costs low benefitting consumers
Why is dynamic efficiency less likely in a contestable market
firms avoid reinvesting supernormal profits into Research and Development and innovation because potential competition discourages long term investment
firms produce at ar=AC normal rpfoit slaes ma in order to limit threat of entry by new firms )
how does the fear of hit and run competition lead to productive inefficency
firms may avoid expanding and exploting economies of scale due to the risk of short term entrants eroding profits leading to higher costs and consumer prices
what is “hit and run competition” in contestable markets
when new firms enter the market temporarily to take advantage of supernormal profits and then exit before prices falls.
Evaluation for allocative efficent outcomes achieved in a contestable market
the drive to reduce costs may lead to shortcuts taken in prouction processs where the actual quality of output may not be good. this is becuase cost savings might imply poorer customer service and less focus on quality perks which raise COP.
Evaluations
1) Incumbent firms may build their own barriers to enrtry such as heavy advertising , predatory pricing or flooidng the maket with product to scare off new entry which leads to outcomes of high prices and low quantities produced.
lack of expanision
fear of hit and run comp may prevent s a firm maming large snp due to increase threat of entry less productive efficinet
Perfectly Contestable Market Firm Behaviour
Firms in a perfectly contestable market will not produce at MC=MR as they fear it will cause an increase in threat of new entry into market thereby firms change behaviour by pricing at entry limit price(sales max AC=AR)=lower prices and higher quantities
pros of contestable markets
Allocative efficiency
Productive Efficiency and EOS-firms operate close to mc=ac lowest point on curve to be competitive -increase EOS- a fall in AC fall in prices
X-inefficiency-desire to reduce costs to to remain competitive
