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Summary Nature of economics A Level Notes
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Discuss the level of contestability in the e-bike market.The theory of contestability states that how the firms in a market behave is not only
determined by the real threats of competition, but also by the potential competitions. This
means that if other firms could enter the market easily, existing firms would act as if it was
in competition, therefore lower the price and raise the output.
The e-bike industry is shown to be fairly contestable due to the fact that new firms are
entering, this can be proven by extract 3 where it said, ‘most traditional brands are coming
out with e-bikes lines as well’, this implies that the barrier to enter the industry is low, thus
the potential competition is high. However, as mentioned from extract 3, only two firms do
not already make traditional bikes, this indicates that these ‘newly established’ firms are
usually large and are able to cross subsidise, the e-bike market is thus not as contestable as
it seems to be as most of the ‘new firms’ were previously in related industries.
Extract 3 also mentioned that ‘almost all brands source their electrical components such as
batteries from the same few suppliers’, this shows that the industry is contestable as all
firms have same or similar cost of production, therefore small firms are less likely to be
squeezed out by larger firms which might make use of their economies of scales to lower
cost, lower price and raise output to increase their competitiveness. However, it is possible
for larger firms to merge vertically with the battery suppliers, this means that the larger
firms are more likely to obtain ownership of key factors of production, thus gain a monopoly
power on the supply of key materials, therefore increasing their market shares and make
the market less contestable. Also, although electrical components of the e-bikes may be
obtained from the same few suppliers, the design element still acts as a barrier of entry to
new firms, as the e-bikes require ‘sophisticated electronic controls’ which therefore will
increase the initial cost of setting up the firm thus decreases contestability of the market.
Moreover, due to technological development, goods can now be sold online which make
most markets including the e-bike market more contestable, as consumers can obtain better
information of the goods more easily, for example, shoe leather cost is reduced and
consumers can compare cost of goods simply by using price comparison websites.
However, using online websites to sell goods still require marketing costs, and in order for
your product to stand out, more marketing has to be done which may raise the sunk cost
and thus raise the barrier of entering and exiting the market. Also, as technology keeps
improving, the sunk cost of machinery may also increase, and there will also be an
increasing initial cost of employing workers who can control these machines, which again
raises the barrier of entry and exit, thus decreases contestability of the market.
Furthermore, unlike other goods, consumers are less likely to buy e-bikes online as sizes and
comfortability are difficult to be known without trying it in reality. Therefore, technological
improvement may not have as much impact on e-bike industry compare to other industries.
In reality, no market is perfectly contestable, including the e-bike market, the extent to its
contestability depends on behavior of the firms as well as the consumers. Firms may merge
to decrease contestability of the market, and there may not be a large enough group of
consumers to attract new firms entering so the market may still remain relatively
uncontestable even though existing firms are not doing anything.
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