Contestability in Markets
Contestability in perfect, monopolistic, monopoly and oligopolistic markets
- Created by: TessAni
- Created on: 19-01-13 11:59
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- Contestability
- The extent to which barriers to entry and exit in a market are free and costless
- Perfect Contestability
- all firms are subject to the same regulations and state of technology
- Entry and exit are costless
- Sunk Costs: those costs tat cannot be recovered if a firm ceases operation
- mechanisms are in place to prohibit responsive or entry limit pricing, as existing firms have lower costs than potential entrants
- Pool of potential entrants into the market
- incumbent firms are vulnerable to hit-and-run competition
- The way in which a firm enters a market where supernormal profits are being earned and leaves when profits return to normal
- Oligopolies
- High barriers to entry - capital costs
- Very difficult to build up market share
- Monopoly Power
- Often legal way to gain monopoly power - therefore very uncontestable
- May be theoretically contestable (but not costless)
- Monopolistic Competition
- low barriers to entry
- non-price competition = time lag to build up brand loyalty
- regulation is the standard form of barriers to entry
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