contestable market

• A contestable market is one where there is a threat of competition
• The threat of competition in a contestable market can affect the behavior of firms.
• What are the three fundamental characteristics of a contestable market?

  Low barriers to entry and exit, large pool of potential entrants, good information of market conditions
• Incumbent firms in a contestable market are subject to hit and run competition
• Steps for a new firm entering a contestable market under hit and run competition

  1️⃣ Low barriers to entry

  2️⃣ Supernormal profit exists

  3️⃣ New firm enters the market

  4️⃣ New firm snatches supernormal profit

  5️⃣ New firm exits the market
• What are the consequences of hit and run competition in a contestable market?

  New firms enter, snatch profit, exit quickly
• The rise of technology has increased the contestability of markets.
• Technology allows economies of scale like technical economies of scale
• How has technology reduced barriers to entry in contestable markets?

  Reduces startup costs, sunk costs
• How has technology increased the pool of potential entrants in contestable markets?

  Innovation, cheaper production methods
• Match the type of information with its source:

  Cost information ↔️ Market conditions

  Technology information ↔️ Internet
• Technology has improved information flow for firms in contestable markets.
• A monopoly market can be contestable if barriers to entry are low enough
• What are the characteristics of a perfectly contestable market?

  No barriers, perfect information
• In a contestable monopoly, the monopolist may move to the limit price to avoid entry.
• What is the limit price in a contestable market?

  Price where AC equals AR
• Firms in a contestable market lower prices to eliminate the threat of entry.
• What are the end results of contestability in terms of price and quantity?

  Lower prices, higher quantities
• In reality, firms in a contestable market may not reach the extreme position of AC equals AR
• Contestability leads to competitive outcomes like lower prices and higher quantities even if it doesn't reach the extreme point.
• Match the efficiency type with its description:

  Allocative efficiency ↔️ Lower prices, higher consumer surplus

  Productive efficiency ↔️ Exploitation of economies of scale

  X efficiency ↔️ Minimizing waste
• What are the static efficiencies achieved in a contestable market?

  Allocative, productive, X efficiency
• Greater quantity in a contestable market can lead to more job creation
• A lack of dynamic efficiency is a potential issue in contestable markets due to lower profit margins.
• How can innovation in a contestable market improve dynamic efficiency?

  New firms introduce ideas
• Cost-cutting in dangerous areas like health and safety can be a concern in contestable markets.
• What is creative destruction in a contestable market?

  New firms destroy existing ones
• Anti-competitive strategies in contestable markets can reduce contestability
• Predatory pricing is an anti-competitive strategy used to eliminate the threat of entry in contestable markets.
• Match the regulatory area with its purpose:

  Product standards ↔️ Ensure quality and safety

  Environmental standards ↔️ Protect natural resources

  Anti-competitive strategies ↔️ Maintain market competition
• What is the role of regulation in maintaining contestability?

  Prevents anti-competitive strategies