contestability

• theory of contestable markets


  considers how threat of new entry might affect conduct of incumbent firms (those already in the market)

  potential competition seen to be key influence on firms rather than actual competition

  seen at a local, regional and international lvl + almost all markets are contestable to some degree

  technology changing contestability e.g. barriers to entry lowered due to digital advances, start-ups use internet as platform to enter markets

  often show high dynamic efficiency - challenger brands attacking established operators
• key conditions

  1. pool of new businesses willing + ready to enter the market e.g. app developers
  2. no significant entry or exit costs - lowers the risk of market entry
  3. equal access to available industry technologies
  4. high rates of customer churn
• willingness to change main supplier 2016


  least willing to change

  internet provider 59.4%

  banking 55.9%

  gas firm 55.3%

  electricity 51.3%

  phone service provider 41.8%

  retail 33.6%

  restaurants 21.7%

  coffee shops 20.2%

  most willing to change
• entrant has access to all production techniques available to incumbents and entry decisions can be reversed without cost
• hit and run entry


  when a business enters an industry to take advantage of temporarily huge supernormal market profits
• sunk costs


  cannot be recovered if a business decides to leave an industry, existence of sunk costs makes a market less contestable
• strategic entry deterrence


  involves any move by existing firms to reinforce their position against potential rivals

  • hostile takeovers and acquisitions
  • product differentiation
  • capacity expansions - lower unit costs from exploiting internal e.o.s
  • predator pricing
• key barriers to contestability

  • internal economies of scale
  • vertical integration
  • strength of customer brand loyalty
  • control of important technology
  • expertise and reputation
  • tariffs and quotas
• scenarios where MES is low, more likely to be contestable