3.4.7 contestability

What is a contestable market?

Entrant has access to all production techniques available to incumbents

Assumptions of contestable market?

Freedom of entry and exit from industry
Number of firms varies from one to many
Firms compete and do not collude
Firms profit maximise
Goods may be homogenous or branded
Perfect knowledge of prices

How can judge contestability?

BRASIL
Barriers to entry- high= less C
R&D- tech videos available= more C- incumbents hold tech advantage- less C
Advertising- low loyalty

Relationship between barriers and contestability

• high barriers that means market is less contestable
• low barriers- more contestable

Low barriers to entry- contestable

• no high start up costs
• no strict gov regulation
  -No strong brand loyalty
• no patents or restrictive licences
• low sunk costs

Zero or low sunk costs

Sunk costs- costs that cannot be recovered if firm leaves market- advertising
Low sunk costs makes exit easy- more contestable

Access to same technology

Potential entrants must be able to

• replicate production methods
• get access to inputs
• compete on equal terms

What are hit and run entrants

Entrants can
Enter the marker
Make short term profit
Exit quickly if incumbent firms retaliate