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Theme 3
Market Structures
3.4.7 - Contestability
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Created by
Saberie Mohammad
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Cards (17)
What does contestability refer to in a market?
Ease of
new firms
entering and
exiting
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How does a contestable market affect existing firms?
It forces them to act
competitively
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What are
low
barriers
to
entry
?
Conditions that allow easy market entry
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What role do antitrust laws play in contestability?
They prevent
anti-competitive
practices
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What is the effect of high barriers to entry on contestability?
They reduce contestability in the
market
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What is the impact of low barriers on prices and efficiency?
They lead to
lower
prices and
higher
efficiency
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What are the characteristics of a contestable market?
Low
barriers to entry
Perfect information
Ease of
market entry and exit
Potential competition
focus
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What is meant by 'hit and run' in contestability?
Firms
entering
and
exiting
quickly
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How do sunk costs affect contestability?
High sunk costs reduce
market entry
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What is a natural monopoly?
A market dominated by one
firm
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What is the relationship between competition and efficiency?
Competition
encourages firms to be
efficient
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How do liberalization policies affect market entry?
They reduce
barriers
to market entry
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What is the effect of churning in a contestable market?
It indicates
firms
are entering and exiting
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What is the significance of perfect information in contestability?
It allows informed decisions by
firms
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How do regulations affect contestability?
Regulations can create
barriers
to entry
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What is the overall effect of contestability on market prices?
It generally leads to
lower
market
prices
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What are the implications of contestability for firms in a market?
Firms must keep
prices
low
Firms must produce efficiently
Firms may innovate to deter entrants
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