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    Contestable Market

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    Anna Ng
    This document defines and discusses the concept of a contestable market. A contestable market is one where there is free entry and exit of firms, with low or zero sunk costs. For a market to be perfectly contestable, sunk costs would be zero and new and incumbent firms would face similar costs, eliminating any competitive advantage of incumbents. The theory is that even without actual new entry or competition, the mere threat of entry and exit is enough to force firms to behave efficiently and not abuse their market power. Making markets more contestable is one way to promote competition without direct government intervention.

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    Download as PDF, TXT or read online from Scribd

    Contestable Market

    Uploaded by

    Anna Ng
    183 views5 pages
    This document defines and discusses the concept of a contestable market. A contestable market is one where there is free entry and exit of firms, with low or zero sunk costs. For a market to be perfectly contestable, sunk costs would be zero and new and incumbent firms would face similar costs, eliminating any competitive advantage of incumbents. The theory is that even without actual new entry or competition, the mere threat of entry and exit is enough to force firms to behave efficiently and not abuse their market power. Making markets more contestable is one way to promote competition without direct government intervention.

    Original Description:

    What is contestable market and the example

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    This document defines and discusses the concept of a contestable market. A contestable market is one where there is free entry and exit of firms, with low or zero sunk costs. For a market to be perfectly contestable, sunk costs would be zero and new and incumbent firms would face similar costs, eliminating any competitive advantage of incumbents. The theory is that even without actual new entry or competition, the mere threat of entry and exit is enough to force firms to behave efficiently and not abuse their market power. Making markets more contestable is one way to promote competition without direct government intervention.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    183 views5 pages

    Contestable Market

    Uploaded by

    Anna Ng
    This document defines and discusses the concept of a contestable market. A contestable market is one where there is free entry and exit of firms, with low or zero sunk costs. For a market to be perfectly contestable, sunk costs would be zero and new and incumbent firms would face similar costs, eliminating any competitive advantage of incumbents. The theory is that even without actual new entry or competition, the mere threat of entry and exit is enough to force firms to behave efficiently and not abuse their market power. Making markets more contestable is one way to promote competition without direct government intervention.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    Contestable Markets

    What is a Contestable Market?


    Contestability is not only about barriers to entry but also about the ease of exit
    from the industry
    In a perfectly contestable market sunk costs would be zero
    Contestability is not necessarily about minimising all barriers; it is more about
    existing and new firms facing similar costs so incumbent firms have no
    competitive advantage over new entrants

    The theory is that new entrants and competition is not necessary to make firms
    behave in ways which maximise welfare
    (productive efficiency working at bottom of ATC curve,
    allocative efficiency where AR=MC)
    all that is needed is the THREAT of new entrants

    Therefore making markets more contestable is one way to combat the abuse of
    market power
    Contestable Market: where there is free entry and free exit of other firms
    Example
    Oxford Walking Tours
    Contestable Market:
    where there is free entry
    and free exit of other
    firms

    Ease of exit sunk costs

    Similar costs for new
    entrants and incumbents
    New entrant
    Incumbent
    response
    Diagram: Extreme Contestability
    Perfect Contestability: unlikely in
    reality, but close to is achievable

    Imperfect competition downward
    sloping D curve

    Resembles perfect competition
    productive and allocative efficiency is
    achieved

    Normal profits are made AR=AC

    There is no need for the government
    to intervene in this market
    efficiency is achieved through
    contestability!
    Sunk Costs: sunk costs are retrospective (past) costs that have
    already been incurred and cannot be recovered e.g.
    advertising
    Hit and Run Entry: where new firms enter the industry, cream
    off some of the supernormal profits of the incumbents and
    then exit
    Key Definitions

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