3.5.8 Contestable and non-contestable markets

• Low barriers to entry in contestable markets attract potential competitors.


  True
• What type of technology availability enables new competitors to operate efficiently in contestable markets?

  Advanced technology
• High potential competition in contestable markets encourages incumbents to maintain low prices
• What impact do high barriers to entry have on competition in non-contestable markets?

  Limits competition
• Contestable markets are those in which potential competitors can enter and exit the market quickly and at low cost
• Low barriers to exit in contestable markets encourage risk-taking by entrants
• Hit-and-run entry allows new firms to exit before incumbents can react.


  True
• Non-contestable markets have high barriers to entry and exit.


  True
• High barriers to exit discourage new firms from entering
• Why do firms in non-contestable markets operate without pressure to lower prices?

  No potential competition
• Order the stages of hit-and-run entry in contestable markets.

  1️⃣ Entry into the market

  2️⃣ Capture profits

  3️⃣ Exit before incumbents react
• What role do minimal costs and regulations play in contestable markets?

  Low barrier to entry
• High barriers to entry in non-contestable markets allow incumbents to maintain market share.

  True
• Firms in non-contestable markets operate without pressure to maximize efficiency
• How does the level of competition differ between contestable and non-contestable markets?

  High vs. Low
• Why is consumer welfare higher in contestable markets?

  Low prices and diversity
• A low barrier to exit in a contestable market encourages risk-taking by new entrants
• What is the threat of hit-and-run entry in a contestable market?

  Disciplines incumbents
• What is the effect of a low barrier to exit on new firms in a contestable market?

  Encourages risk-taking
• Match the key characteristic with its impact on the market:

  Low Barrier to Entry ↔️ Attracts potential competitors

  Low Barrier to Exit ↔️ Encourages risk-taking by entrants

  Threat of Hit-and-Run Entry ↔️ Disciplines incumbents
• High barriers to entry in non-contestable markets limit competition and allow incumbents to maintain market share

  True
• Compare key characteristics of contestable and non-contestable markets:

  Barriers to Entry & Exit in Contestable Markets ↔️ Low

  Barriers to Entry & Exit in Non-Contestable Markets ↔️ High

  Number of Firms in Contestable Markets ↔️ Numerous potential entrants
• What is the market efficiency level in contestable markets?

  Efficient resource allocation
• Why is consumer welfare higher in contestable markets?

  Low prices and diversity
• The high degree of potential competition in contestable markets encourages incumbents to operate efficiently and maintain low prices
• High barriers to entry in non-contestable markets limit competition and allow incumbents to maintain market share
• A low threat of hit-and-run entry in non-contestable markets allows incumbents to operate without significant competitive pressure
• Contestable markets are characterized by low barriers to entry and exit
• Contestable markets are those where potential competitors can enter and exit the market quickly and at low cost
• Non-contestable markets are characterized by high barriers to entry and exit
• Contestable markets have low barriers to entry and exit, while non-contestable markets have high barriers.

  True
• What is a key characteristic of contestable markets?

  Low barriers to entry
• Consumers benefit from lower prices in contestable markets.


  True
• Non-contestable markets may lead to reduced consumer choice
• Dominant firms in non-contestable markets maintain market share due to high barriers.


  True
• Match the market type with its characteristic:

  Contestable ↔️ Low barriers to entry

  Non-contestable ↔️ High barriers to exit
• Low technology access reduces the competitiveness of new firms in non-contestable markets.


  True
• Low barriers to entry in contestable markets attract potential competitors.


  True
• Non-contestable markets are characterized by high barriers to entry and exit
• What is the impact of high exit barriers on firms in non-contestable markets?

  Difficulty leaving the market