Contestability

• 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
• How does consumer loyalty affect contestable markets?

  There is low consumer loyalty
• How many firms can be in a contestable market?

  The number of firms varies
• What efficiency are firms more likely to achieve in contestable markets?

  Allocative efficiency
• 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 affect in contestable markets?

  Firms just as much as existing competitors
• What is hit-and-run competition?

  New firms take supernormal profits and 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?

  Normal profits
• Why do firms only earn normal profits in the short run?

  To prevent potential competition
• What do barriers to entry aim to do?

  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 to entry?

  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 market contestability?

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

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

  Firms make losses
• What happens to prices after firms leave due to predatory pricing?

  Remaining firms raise prices slowly
• What is limit pricing?

  Ensuring prices are below sustainable levels for new firms
• How do anti-competitive practices affect market entry?

  They discourage new firms from entering
• 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 prevent?

  Firms from leaving a market quickly and cheaply
• What costs are included in barriers to exit?

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

  Losing a 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?

  Lowering the price to increase long-run 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?

  They have no costs to entry and exit
• What are sunk costs?

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

  They make entering less favorable
• What market structure do high sunk costs push towards?

  A price and output similar to a monopoly