Contestibility

• What is the theory that emphasizes the ease or difficulty of entry for firms?

  Contestable Markets
• How does the theory of contestable markets differ from traditional market structure analysis?


  It focuses on the ability of firms to enter or exit the market rather than specific criteria or assumptions.
• What is assessed to determine the level of contestability in a market?

  The barriers to entry.
• What characterizes a highly contestable market?

  It is open to actual or potential competition with low barriers to entry.
• What must be true for a perfectly contestable market?


  Entry and exit must be costless and easy.
• What are some key conditions that impact the ease of entry and exit in a highly contestable market?

  Absence of sunk costs, access to technology, and low consumer loyalty.
• How do barriers to entry affect profits in different market structures?

  Barriers to entry allow profits to be earned in the long run in monopolies and oligopolies.
• Can an oligopolistic market be contestable? If so, under what condition?


  Yes, if existing firms face potential competition.
• Who first defined the theory of contestable markets?

  William Baumol
• What does Baumol state about entrants in contestable markets?


  Entrants have access to all production techniques and can attract incumbent customers.
• Why might a monopoly behave competitively in a contestable market?

  Due to the threat of potential new entrants.
• What is the implication of contestability for government intervention in monopolies?

  Highly contestable monopolies may require less government intervention.
• What is a key criticism of the theory of contestable markets?

  No market is perfectly contestable.
• What information is needed to test the theory of contestable markets?

  Information about the cost structure of incumbents and the overall market.
• Why is the absence of new competition over time not sufficient evidence of a lack of contestability?


  Because it centers around the threat of potential new entrants, not actual entry.
• What is limit pricing in the context of contestable markets?

  Setting prices to only make normal profits to deter potential entrants.
• What should you consider when assessing the level of contestability in a market?


  • Identify low barriers to entry/exit or low sunk costs.
  • Look for signs of high contestability (e.g., recent new entrants).
  • Evaluate aspects that demonstrate high barriers to entry/exit or high sunk costs.
• What are some factors that have led to increased contestability in markets recently?

  Entrepreneurial zeal, recession, deregulation, tougher competition policy, EU Single Market, and technological change.
• How does entrepreneurial zeal contribute to market contestability?

  It leads to new suppliers challenging existing market structures through innovation and competitive pricing.
• How can a recession affect market contestability?


  It can open up markets to new businesses, increasing competition.
• What is the effect of deregulation on market contestability?


  Deregulation reduces statutory barriers to entry, increasing competition.
• How do tougher competition laws affect market contestability?

  They act against predatory behavior, making markets more contestable.
• What is the impact of the EU Single Market on contestability?

  It opens up markets for member nations, increasing competition.
• How has technological change affected market contestability?

  It has reduced entry costs and increased capital mobility, enhancing contestability.
• What role does technological spill-over play in contestability?

  It can lead to the emergence of new products, increasing competition.
• What are the implications of contestability for firms in a market?

  • Firms must be efficient to avoid new entrants.
  • Profits are likely to be close to normal due to potential competition.
  • The threat of 'hit and run' tactics influences pricing strategies.