Contestable markets - Chapter 6
- 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
- No barriers to entry = threat of new entrants = efficient
- 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
- Whereas contestable markets focus on possibility of contestability
- Monopoly/Oligopoly theory concentrate on the number of firms
- Reduces likelihood of government failiure
- 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
- Contestable markets is just a theory - no sunk costs is unlikely in reality
- 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
- Limited application
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