jojo1995
Badges: 2
Rep:
?
#1
Report Thread starter 6 years ago
#1
could someone please tell me the characteristics of a contestable market? , i know two :

low sunk costs
low start up costs


thank you
0
reply
Denacio
Badges: 8
Rep:
?
#2
Report 6 years ago
#2
Low prices
High output
Little/no barriers to entry
1
reply
Lay-Z
Badges: 20
Rep:
?
#3
Report 6 years ago
#3
Low sunk costs and low barriers to exit are the main ones, they mean that there is always a threat at businesses coming into the market and being able to leave without incurring significant costs. Theory suggests that this potential competition is enough to cause company's to reduce costs and operate more efficently
1
reply
jojo1995
Badges: 2
Rep:
?
#4
Report Thread starter 6 years ago
#4
(Original post by Lay-Z)
Low sunk costs and low barriers to exit are the main ones, they mean that there is always a threat at businesses coming into the market and being able to leave without incurring significant costs. Theory suggests that this potential competition is enough to cause company's to reduce costs and operate more efficently
thank you very much

(Original post by Denacio)
Low prices
High output
Little/no barriers to entry
0
reply
rasclerhys
Badges: 3
Rep:
?
#5
Report 6 years ago
#5
A contestable market is a market which has low barriers to entry and exit (no sunk costs), entry can happen rapidly (i.e. no time barriers, this permits hit and run tactics), the production process is well known and the technology needed is easily acquirable, and Baumol added a further condition; firms have the ability "to woo customers".

There are very few markets which are contestable as many require heavy advertising at the least (this represents a sunk cost). However in theory contestable markets result in monopoly firms having to reduce their prices in order to make the market seem less attractive to new entrants (and thus make a lower supernormal profit) if they didn't do this then theory shows that new firms could easily enter the market and take away the monopoly firms market share and supernormal profit. If the market is heavily contestable then the incumbent firm/firms may decide to set price equal to AR=ATC (sales maximisation) and hence make no supernormal profit but still retain (and perhaps enlarge) market share.

Obviously this is good for consumers as monopoly firms which exist in contestable markets cant exploit their monopoly power as much (therefore less regulation is needed) and so consumers get lower prices and better services. However it could be argued that for a market where there is no supernormal profit being earned there will be no investment into innovation and research and design (as argued by Schumpeter).
The result for the producers (the incumbent firms) is lower (or no) supernormal profit and the threat of new entrants. However this should result in them producing x-efficiently, otherwise new firms would enter the market and would produce x-efficiently hence being able to offer a lower price and forcing the inefficient firm out of business.

Hope this helps,

Rhys
0
reply
X

Quick Reply

Attached files
Write a reply...
Reply
new posts
Back
to top
Latest
My Feed

See more of what you like on
The Student Room

You can personalise what you see on TSR. Tell us a little about yourself to get started.

Personalise

University open days

  • Cardiff Metropolitan University
    Undergraduate Open Day - Llandaff Campus Undergraduate
    Sat, 19 Oct '19
  • Coventry University
    Undergraduate Open Day Undergraduate
    Sat, 19 Oct '19
  • University of Birmingham
    Undergraduate Open Day Undergraduate
    Sat, 19 Oct '19

Why wouldn't you turn to teachers if you were being bullied?

They might tell my parents (26)
7.22%
They might tell the bully (34)
9.44%
I don't think they'd understand (55)
15.28%
It might lead to more bullying (139)
38.61%
There's nothing they could do (106)
29.44%

Watched Threads

View All