contestable market

• 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 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
• How do contestable markets affect firm efficiency?

  Firms are more likely to be allocatively efficient
• Where do firms operate in the long run in contestable markets?

  At the bottom of the average cost curve
• What does the threat of new entrants lead to in contestable markets?

  Firms are wary of losing supernormal profits
• What is hit-and-run competition?

  New firms enter, take profits, then leave
• How do highly contestable markets compare to perfectly competitive markets?

  They are akin to perfectly competitive markets
• What profits can firms earn in the short run in contestable markets?

  Supernormal profits
• What profits do firms typically earn in the long run?

  Only normal profits
• Why is it important for firms to earn normal profits?

  To prevent potential competition
• What do barriers to entry do in contestable markets?

  Block new entrants to the market
• How do economies of scale affect new entrants?

  They make it less likely for new firms to enter
• What are legal barriers in contestable markets?

  Patents and exclusive rights to production
• How do market licenses act as barriers to entry?

  New firms must gain a license to operate
• How does consumer loyalty affect contestability?

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

  Setting low prices to drive out competitors
• What happens to prices after predatory pricing drives out firms?

  Remaining firms raise prices slowly
• What is limit pricing?

  Setting prices below sustainable levels for new firms
• How do anti-competitive practices affect contestability?

  They reduce competition and contestability
• What does vertical integration create?

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

  It disguises actual market concentration
• What do barriers to exit do?

  Prevent firms from leaving quickly and cheaply
• What costs are associated with barriers to exit?

  Costs to write off assets and pay leases
• What is a cost of leaving the market?

  Losing brand and consumer loyalty
• How might redundancy costs affect firms?

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

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

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

  It varies based on costs and consumer loyalty
• What is a characteristic of perfectly contestable markets?

  No markets are perfectly contestable
• What are sunk costs?

  Costs that cannot be recovered once spent
• How do high sunk costs affect market entry?

  They make entering the market less favorable
• What are the advantages and disadvantages of contestable markets?

  Advantages:

  • May lead to lower prices for consumers
  • Higher competition reduces government intervention

  
  

  Disadvantages:

  • Less dynamic efficiency due to lack of supernormal profits
• What is the implication of higher competition in contestable markets?

  It may lead to lower prices for consumers
• How does higher competition affect government intervention?

  It reduces the need for government intervention