Contestable markets

• What do contestable markets face?

  Actual and potential competition
• What access do entrants to contestable markets have?

  Free access to production techniques and technology
• What barriers are absent in contestable markets?

  No significant entry or exit barriers
• What are sunk costs in the context of contestable markets?

  Costs that cannot be recovered once spent
• What is the level of consumer loyalty in contestable markets?

  Low consumer loyalty
• How does the number of firms in contestable markets vary?

  The number of firms can vary
• What are the implications of contestable markets for firm behavior?

  • Firms are more likely to be allocatively efficient
  • Operate at the bottom of the average cost curve
  • Threat of new entrants affects firms like existing competitors
  • Firms wary of new entrants due to low barriers
• What is hit-and-run competition?

  New firms entering and leaving quickly
• How do highly contestable markets compare to perfectly competitive markets?

  They act as though there is much competition
• What profits can firms earn in the short run in contestable markets?

  Supernormal profits
• Why can firms only earn normal profits in the long run?

  To prevent potential competition
• What are barriers to entry and exit in contestable markets?

  • Barriers to entry block new entrants
  • Increase producer surplus
  • Barriers to exit prevent quick and cheap market exit
• What is a cost of leaving the market?

  Losing brand and consumer loyalty
• How might the cost of redundancy affect firms?

  It might discourage firms from leaving
• How did Amazon create barriers to entry?

  By exploiting workers and exclusivity
• What strategy did Amazon use with the Kindle?

  Lowered the price to increase long-term revenue
• What factors affect the degree of contestability in markets?

  • Types of costs firms face
  • Consumer loyalty levels
  • No markets are perfectly contestable
• How does Ryanair enter the market cheaply?

  By choosing less popular landing slots
• What effect do high sunk costs have on market entry?

  They make entry less favorable
• What are sunk costs?

  Costs that cannot be recovered
• How do economies of scale affect new market entrants?

  They make it harder for new firms to compete
• What legal barriers can act as barriers to entry?

  Patents and exclusive rights
• How do market licenses affect new firms?

  They create a barrier to entry
• How does consumer loyalty affect contestability?

  It makes demand more price inelastic
• What is predatory pricing?

  Setting low prices to drive out competitors
• What is the short-term effect of predatory pricing?

  It leads to losses for the firm
• How does limit pricing discourage new entrants?

  It keeps prices below sustainable levels for newcomers
• What are anti-competitive practices?

  Refusing to supply competitors' retailers
• What does vertical integration create?

  A barrier to entry
• How does brand proliferation affect market concentration?

  It disguises actual market concentration
• What are barriers to exit in contestable markets?

  • Costs to write off assets
  • Paying leases and contracts
  • Makes it cheaper to stay than leave