Contestability in Markets

Contestability in perfect, monopolistic, monopoly and oligopolistic markets 

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  • 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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