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7 Cards in this Set
- Front
- Back
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Def of contestable market |
This is a situation in any market structure where the existing firms in the industry feel a threat of potential competition of new firms entering in the market due to low or no barriers of entry and exist. This threat is enough to keep prices low . When any firm behave in this consumers benefit of low prices and economies of scale |
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Benefit to the public interest 4 |
1) lower prices ( allocatively efficiency) 2) increased incentives for firms to cut costs ( x efficiency) 3) increased incentives to respond to consumers preference ( x efficiency) 4) economies of scale |
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Factors which determine the contestability of a market 6 |
1. Low barriers to entry or exist \that new firms can come into the market to provide competition to the existing firms. Firms can also decided to leave the industry with no sunk costs. If sunk costs are low this makes it easier for new firms to enter and leave the market. Therefore it will be more contestable. While if there are high sink costs it acts a barrier to entry of new firms because they risk making losses if they decide to exit the sector. For example, if a new firm had to purchase raw materials, that it wouldn’t be able to resell on leaving the market, this may act as a deterrent.
2) The level of profit. In theory, if firms are making supernormal profit, it would attract new firms into the market as firms are motivated by supernormal profits. Theforethe existence of supernormal profits may make the market more contestable. This makes the constable market to be characterized by a hit and run. This occurs when a firm temporarily enters a market and leaves the market when SP are exhausted. 3) Access to technology. For some industries like car production it is difficult for new firms to have the right technology. Nuclear power may require skilled labour that is difficult to get. This makes the market less contestable. While, a market can be more contactable if they have access to the same technology. This makes firms to produce similar products in terms of quantify and cost structure 4) Legislation by government against Predatory Pricing by setting the price below AC .If a firm can engage in predatory pricing it can force new firms out of business and make it less contestable 5) Levels of advertising and brand loyalty. If an established firm has significant brand loyalty such as Coca-Cola, then it will be difficult for a new firm to enter the market. This is because they would have to spend a lot of money on advertising which is a sunk cost. Suggesting hit and run competition doesn’t occur. Even if they spend money on advertising it may not be sufficient to change customer loyalty to very strong brands. It depends on the industry; customer loyalty would be fairly low for a product like petrol because it is quite homogenous. But, for soft drinks, people have greater attachment to their ‘brand’ 6) The number of firms. A contestable market could have a low number of firms – as long as there is the threat and possibility of new firms entering. However, if there are only a few firms and it has been many years since any new firms have entered, then it is likely to be less contestable. If there are recent examples of firms entering the market, then it is likely to be more contestable |
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This that increase contestabilitu of firms 5 |
1) legislation against predatory pricing 2) deregulation of an industry 3) The introduction of the internet has reduced set up costs. To set up a network of branches is a high fixed cost. The internet has enabled firms to compete with lower set up cost. Generally, the costs od running an online shop ads lower fang High street retail shops and enabled new firms to enter the market for online banking e.g. EGG, Virgin business. 4) A government firm. In the banking industry, the government has even toyed with creating its own company to help increase competition and increase bank lending to small firms. This could be a last resort where private firms face insurmountable barriers to entry. 5) encourage international trade |
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Evaluation of internet |
1) the internet may work better for some industries than others, example clothing rentals may not work 2) the internet has created its own barriers of entry. For example it’s difficult to get high google rankings unless you are established 3) the internet has created new monopolies, such as amazon. Amazon dominate the market for online retail |
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Evaluation of contestable market |
In practice there are few markets are perfect contestable, however there are degrees of contestability, some markets having more capacity for new firms to enter |
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Example of contestable market |
For example in the school canteen may be considered a monopoly but contestable simply because individuals run in the school canteen might feel a threats of been replaced by the school administration when they do not provide the quality good or service to students |
