5.10

• Contesable markets definition

  A market in which the potential exists for new firms to enter the market. A perfectly contesable market has no entry or exit barriers and no sunk costs, and both incumbent firms and new entrants have access to the same level of technology
• what are the key feature of a contestable market?

  • low barriers to entry and exit
  • access to similar technology
  • no sunk costs
  • existing firms are vulnerable to ‘hit and run’ entry
• what are sunk cost?

  costs that cannot be recovered if a firm leaves the market (e.g marketing campaigns, specialist equipment)
• What is the ‘hit and run‘ theory?

  Firms can enter a market, make short-term profits, then leave quickly before incumbents react - only possible in highly contestable markets
• hit and run competition definition

  situation where a firms can quickly enter a market to benefit from abnormal profit made within the market and then quickly leave when abnormal profits are eliminated
• examples of contestable markets ?

  • online retail (e.g Etsy sellers)
  • taxi services (Uber, Bolt etc)
  • some parts of the airline industry (e.g budget routes)
• what is a non-contestable market?

  a market with high barriers to entry or exit, where new firms struggle to compete or enter - often due to legal, financial or technical challenges
• examples of non-contestable markets?

  • public utilities (e.g water, gas)
  • rail service
  • telecoms infrastructure
• why might a monopoly behave competitively in a contestable market ?

  because the threat of entry disciplines their behaviour:

  • may keep prices low
  • avoid exploiting consumers
  • try to appear efficient
• what factors increase contestability?

  • deregulation
  • technology (e.g e-commerce)
  • low sunk costs
  • shared access to resources (e.g gig economy platforms)
• what factors reduce contestability ?

  • high sunk costs
  • legal barriers (e.g licenses)
  • strong brand loyalty
  • economies of scale held by big firms
• Evaluation: is a contestable market always efficient ?

  + lower prices

  + innovation

  • short term thinking
  • Instability if firms enter/exit too quickly
  • Lower dynamic efficiency if profits are too low
• contestable markets advantages

  • lower prices for consumers
  • improved efficiency
  • innovation and quality improvements
  • flexibility and consumer choice
  • dynamic efficiency
• contestable markets disadvantages

  • risk of ‘hit and run’ entry
  • lack of long-term investments
  • market instability
  • economies of scale may be lost
  • risk of lower quality
• price controls defintion

  legal minimum or maximum prices set for specified goods. usually implemented as a means of direct economic intervention ro manage the affordability of certain goods and services, including rent, gasoline and food