3.4.7 Contestability

• Characteristics of a Contestable Market


  -Low sunk costs

  -Perfect knowledge

  -Vulnerable to new firms entering the market

  -Low price-setting power, low prices and low profits
• Benefits of Contestable Markets

  -Lower prices increase the consumer surplus

  -Can have allocative efficiency

  -Incentivised to cut costs so are likely x-efficient

  -More responsive to consumer preferences so more choice
• Factors Determining Contestability


  -Levels of sunk costs required to enter an industry

  -Levels of advertising and brand loyalty

  -Vertical integration as firms can restrict the supply chain

  -Access to tech and skilled labour
• Methods to Increase Contestability


  -Remove legal barriers to entry

  -Improve information sharing

  -Penalise predatory pricing

  -Improve access to finance

  -Remove patents