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Full revision notes for Edexcel Economics A Paper 2 Macroeconomics
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PEARSON (PEARSON)
Economics A
Unit 3 - Business behaviour and the labour market
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3.4.7 Contestability
Contestable market: Where there is free cost to entry or exit and has no sunk costs,
which are costs that can’t be recovered when leaving the industry
Not the no. of firms in the firm but the ease by which new firms can enter/exit
a) Characteristics of contestable markets
Free entry or exit
No sunk costs
b) Implications of high contestable markets for the behavior of firms (=competitive)
Lower price – (allocative efficiency (P=MC))
Incentive to cut costs (X-efficiency + productive efficiency(AC=MC))
Competition incentive to innovate (dynamic efficiency)
No SN profit (no dynamic efficiency)
c) Types of barrier to entry and exit
EOS
Brand loyalty
Advertising (sunk costs)
High initial set up costs
Access to distributional channel
Access to tech.
Patent (prevent other firms from copying without patent holder’s permission)
Whether incumbent firms vertically integrated
Limit pricing
Vertical integration
However, still contestable
Niche market (e.g. Grand central compete with LNER for one network)
Big firms come in with EOS
Tech. advances = allow online business (esp COVID now)
d) Sunk costs and the degree of contestability
Sunk costs: costs that cannot be recovered when leaving the industry
E.g. advertising, (plane industry) planes
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