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Explanation of Contestable Markets
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Notes detailing: - Characteristics - Examples - Diagrams - Pros and Cons - Evaluation ...of contestable markets
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Contestable Marketsa market where there is a threat of competition
characteristics
potential entrants must know about cos
* Low barriers to entry ( exit and technology that if to
so
they were
*
Large pond of potential entrants enter the market , they would be on a
Firms
the market
already in
* Good information
regarding market conditions level
playing field .
* Incumbent firms subject to hit and run competition .
cause a serious threat of entry > when
profit
new
then leave
firms enter the market quickly , snatch some superno
quickly before firms can react and ↳ wer their pr
in the market 7
margins
Due increase in
to the
large technology in the last few decades the overall ante
stability of markets has increased giv
that businesses no
longer have to be physical entities , reducing start -
up costs and sunk costs .
Moreover it ,
makes technical
economies of scale easier to achieve and advertising easier to
carry out .
Therefore ,
barriers to entry are reduced .
L
,
Technology has also increased the pod of potential entrants .
allowed for greater innovation increasing the amount of entrepreneurs with ideas they want to take to market
-
,
-
allowed new entrants to find I create better production methods to disrupt existing firms .
Technology has also increased the
reliability and communication of information .
Example of a
firms behaviour in a untestable market
Monopoly A market doesn't have to be perfectly
contestable to experience contestable behowovir
P me
Ac If a monopoly is in a contestable market they would decrease
their supernormal profits to dissuade new firms from entering the
pz
- - -
- -
- -
- -
-
i
market Thus they closer to their limit price where AR AC -
. move -
,
← -
-
-
- ! -
- - -
(sales maximising) .
This will also make them more
price competitiv
p
- - - - - -
' '
-
.
,
.
that prepared
.
in the new thus
.
; i event a
firm enters , they are to comp
'
I
p - - - - -
-
AR with lower
prices and
higher quantities
g
-
- - - -
,
.
'
l
MR l
if 9 92 Q
f
.
:
§
lower profit margins = less investment over time
⇐
as
& 8
Pros . Cons → is
However ,
new firms coming in with new
ideas
the benefit of dynamic efficiency . : progress ,
dynamic efficiency
innovat
good movements towards . . . * Lack of
g- fd ✓* Allocate efficiency * Cost cutting could be in dangerous areas ,
e -
g. health B safety
or
\
e.e * Productive efficiency Creative disruption innovation could destroy losses
* existing firms and cause job
* X efficiency * Anti -
competitive strategies e.g mergers
.
.
limit pricing can prevent long term
m%%Ywm£¥
firms give job
markets
* Job creation
contest
ability of .
those who ha
*ahem = wo
move to new
firm B ma
job in that
in
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