4.1.2 Barriers to entry

What is a contestable market

A market with actual and potential competition

What allows a market to be contestable

Low barriers to entry and exit

What access do entrants have in contestable markets

Full access to technology

What costs are absent in contestable markets

Sunk costs

What is consumer loyalty like in contestable markets

Low

How does the number of firms change

It varies over time

How do firms behave in contestable markets

As if competition is high

What efficiency is encouraged

Allocative efficiency

Where do firms produce in the long run

Bottom of AC curve

What type of efficiency is this

Productive efficiency

What is hit and run competition

Firms enter take profit and exit

Why do firms avoid supernormal profit

To deter entry

What happens to profits in contestable markets

Normal profits in long run

Why are markets similar to perfect competition

Firms fear potential entrants

What is a barrier to entry

Anything preventing new firms entering

How do economies of scale act as a barrier

New firms face higher costs

What are legal barriers to entry

Patents licences exclusive rights

How does branding reduce contestability

Increases consumer loyalty

What is predatory pricing

Pricing below costs to remove rivals

What is limit pricing

Keeping prices too low for entrants

How do anti competitive practices act as barriers

Firms restrict rivals access

What is vertical integration

Control of more stages of production

How does brand proliferation act as a barrier

Saturates the market

What is a barrier to exit

A cost preventing firms leaving

Give an example of exit barriers

Lease contracts redundancy costs

Why do exit barriers reduce contestability

Firms cannot leave easily

What are sunk costs

Costs that cannot be recovered

Why do sunk costs reduce contestability

Risk of loss is high

What markets have lower contestability

Markets with high sunk costs

Give an example of a contestable market

Budget airlines

Why is the bus industry contestable

Government regulation encourages entry

What are internal economies of scale

Cost advantages from firm growth

What happens to average costs as output rises

They fall

Why do economies of scale act as barriers

Large firms are cheaper

What is risk bearing

Spreading risk across products

What is financial economies of scale

Cheaper borrowing

What is managerial economies of scale

Specialist management

What is technological economies of scale

Advanced machinery

What is marketing economies of scale

Lower advertising cost per unit

What is purchasing economies of scale

Bulk buying discounts

What is the LRAC curve

Average cost in the long run

What happens to LRAC initially

It falls

Why does LRAC rise eventually

Diseconomies of scale

What is minimum efficient scale

Lowest point on LRAC