Contestable market.

So I was doing an economic unit 3 question the other day and it was asking
'To what extent do you think this market is contestable?'
I struggled with this question, any idea how I can answer this question?

Reply 1

dean01234

19

It is basically asking about the barriers to entry / exit.

Look at set-up costs, advertising by current firms, legal barriers, limit pricing and cost advantages in the given market.

Though the actual answer will depend on what market you are talking about...

Reply 2

dan94adibi

OP

14

Original post by dean01234

It is basically asking about the barriers to entry / exit.

Look at set-up costs, advertising by current firms, legal barriers, limit pricing and cost advantages in the given market.

Though the actual answer will depend on what market you are talking about...

Am I looking to see how close that market is to a perfect market?

Reply 3

dean01234

19

Original post by dan94adibi

Am I looking to see how close that market is to a perfect market?

No, the theory of contestable markets is that the threat of competition will make monopolies / oligopolies behave as if there is some competition, in order to keep out potential competition.

A market is contestable if it is easy to enter ie a perfectly competitive market. However if there are lots of barriers to entry the market is not very contestable.

But I would recommend reading through some textbooks, tutor2u or even the mark scheme (only if you are really stuck, and only a quick glance... Don't write your essay from it)

Reply 4

dan94adibi

OP

14

Original post by dean01234

No, the theory of contestable markets is that the threat of competition will make monopolies / oligopolies behave as if there is some competition, in order to keep out potential competition.

A market is contestable if it is easy to enter ie a perfectly competitive market. However if there are lots of barriers to entry the market is not very contestable.

But I would recommend reading through some textbooks, tutor2u or even the mark scheme (only if you are really stuck, and only a quick glance... Don't write your essay from it)