Contestable markets - Chapter 6

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  • Created by: sammilaw
  • Created on: 10-01-16 18:14
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  • Contestable markets
    • Chapter 6
    • Benefits:
      • Reduces likelihood of government failiure
        • No barriers to entry = threat of new entrants = efficient
          • Therefore, does not require government intervention
      • More useful, analytical approach
        • Monopoly/Oligopoly theory concentrate on the number of firms
          • Whereas contestable markets focus on possibility of contestability
            • Could suggests a more useful approach when trying to predict a firms' pricing and output behavious
    • Criticisms:
      • Limited application
        • Contestable markets is just a theory - no sunk costs is unlikely in reality
          • i.e. specialist machinery would make a firm reluctant to leave the market
        • Takeovers and mergers may reduce LR average costs = unachievable EOS for new entrants
      • Technical Knowledge
        • The technical knowledge required to enter may be high - incumbent firms may protect their information
      • Incumbents actions
        • Incumbent firms may protect their goods with patents
        • They may not make their research from R&D widely available - e.g. pharmaceutical companies
        • Possible aggression from incumbents i.e. making new entrants aware of their ability to limit pricing


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