Contestable markets higly detailed UNIT 3

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  • Created on: 19-01-13 15:46
Preview of Contestable markets higly detailed UNIT 3

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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
compete on a level playing ground
Consumer loyalty: habits as we don't like change
Easily available information about the state of the industry.
Freedom to advertise.
A legal right to enter the market.
How contestable are these markets?
Streamed movies on demand: contestability is currently
increasing as internet is enabling firms to start up with
relatively low sunk costs
Retail Coffee stores: highly contestable as it is easy to start up
and machinery is easy to buy e.g. coffee machines
Home delivered pizza: highly contestable as there is not much
technology needed and can advertise through low cost
Budget Hotels: highly contestable due to recession setting in
and more buildings being abandoned in city centres making the
buildings relatively cheap to buy
City Bus and Coach transport: low contestability as it is
governed by the local government
Household Mail services: low contestability as we have to option
but to use post box for letters= monopoly

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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
Easy entry into a market without incurring sunk costs and
expecting immediate profit
Strong brands make it easier
If an industry is making supernormal profits, then a firm can
enter and take advantage of the…read more

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 degree of contestability and how easy it
is to enter the market.…read more

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Vertical Integration- helps firm have all the tech needed to
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
new firms to enter. For airlines, a big issue is whether you can get a
landing slot at a big airport.
5.…read more

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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
restriction on contestability.…read more



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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