Contestability

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  • Contestability
    • Contestable Market - Extent to which entry and exit are free & costless
    • NO Barriers to Entry & Exit
    • NO Sunk Costs
      • Irrecoverable costs that occur from setting up a business
    • Conditions for CM'S to work:
      • 1) Access to same technology
      • 2) Subject to the same regulations as incumbent firms
      • 3) Incumbent firms must not have built up the advantages of brand loyalty
      • 4) Have the same cost advantages
    • In CM prices & costs are determined not only by the competition in market but the Potential Threat of Completion.(Completed)
    • "HIT & RUN" OBJECTIVE
      • Firms enter market - Made Abnormal profits and leave when these disappear
    • Privatisation & Deregulation make market more Contestable
      • Privatisation
        • Sale of state owned business activity to the private sector
      • Deregulations
        • Removal of Rules or Regulations
        • Example: All the market other than London + Northern Ireland were deregulated to make it more contestable + Competitive
        • Example: UK Airline Industry = Deregulated. Increased Growth - More Competition so lower fares, increased service frequency, differentiated products + greater consumer choice
    • Fewer/Lower Risks
    • Example: Manchester Buses - Bus Congestion + Actual or Potential Competition

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