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CONTESTABLE MARKETS

Definition:
Where an entrant has access to all production techniques available
to existing firms and entry decisions can be reversed without a cost.

Key Factors:
Absence of sunk costs: costs that cannot be recovered e.g.
R&D, advertising
Access to technology: if no access to the same tech= cannot…

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Barriers to entry
brand loyalty
Control of important technologies
Expertise & reputation of existing firms
Limit pricing: to prevent new rivals
Predatory pricing: drive out existing firms
Ownership of market licences
Patent/trademark protection
Government awarded franchises

Barriers to exit
Asset write-offs
Lost consumer goodwill
Redundancy costs

Hit and run entry…

Page 3

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The firm will be closer to allocative and productive efficiency than in
a monopoly.

Could also be significant economies of scale because the theory of
contestable markets doesn't require there to be thousands of firms.
Therefore policy makers should not just look at the degree of
concentration, but also the…

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4. Vertical Integration- helps firm have all the tech needed to
compete

If a firm does not have access to the supply of a good then the
market will be less contestable. E.g. the big oil firms could restrict
the supply of petrol tonew petrol stations, making it difficult for…

Page 5

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If a firm can engage in predatory pricing it can force new firms out
of business and make it less contestable.

4. OFT can legislate against theabuse of Monopoly power
If a firm abuses its monopoly power by restricting supply to
certain firms the OFT can intervene to overcome this…

Comments

davidsalter

This is 5 well written pages on contestable markets. It provides practical examples and students can adapt it for their own purposes.

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