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Edexcel A Level Economics A:復(fù)習(xí)筆記3.4.7 Contestability

Category: A-level課程, 教材筆記, 福利干貨 Date: 2022年9月28日上午10:33

A?contestable market?occurs when there is?freedom of entry?into a market & where?costs of exit are low
- A contestable market & competition are different
  - Competition?is based upon the number of?firms competing in a market
  - A?contestable market?is based upon the?threat of new entrants
Contestable markets are characterised by

No barriers to entry or exit:?barriers to entry are low or non-existent & there are no?sunk costs. This allows firms to easily join or leave the market
No competitive disadvantages on entry: new firms are able to setup & immediately compete with existing firms & have access to the?same technology
Perfect information:?There is no proprietary knowledge that would limit competition?(e.g. patents)
Hit & run competition:?Short-run?supernormal profit?acts as a profit signaling mechanism & new firms easily enter the market,?extract profit, then leave

The more contestable a market, the more the?behaviour?of existing competitors may be?modified
- E.g. Firms making?supernormal profit?may change their pricing strategy from?profit maximisation (MC=MR)?to?limit pricing
- They are even likely to set the?price = average cost?(AR=AC)
  - This will reduce?hit & run competition
  - It will result in?normal profit
  - There will be less disruption to the market
The more contestable a market, the more the behaviour of firms?resembles that of firms in?perfect competition

Barriers to entry?are conditions that make it difficult or expensive for a firm to enter a market in order to compete with the existing suppliers
Barriers to exit?are factors that either?prevent a firm from leaving a market, or make it difficult to leave even if they are making a loss

Economies of scale	Legal barriers
Occurs when?an increase in the scale of output?results in a?lower cost per unit?e.g purchasing economies (see sub-topic 3.3.3)	Patents, copyright & government licenses?prevent competitors from entering the market e.g. 5G licenses in the mobile industry
Ownership of essential resources	Anti-competitive practices by competitors
If existing competitors' own resources that are?essential to the production of a product, entry into the industry will be limited e.g cobalt is essential when manufacturing electric batteries and in 2021, Glencore?controlled?22% of the world's supply	These include?predatory pricing,?limit pricing?& aggressive?takeover?activity in order to limit the amount of competition

Sunk Costs & the Degree of Contestability

One of the main barriers to exit is the existence of?sunk costs
- E.g. To enter the industry, the firm may have?acquired expensive assets?that are highly specialised & difficult to resell
- Other examples include money spent on advertising, research & development, branding etc.
If sunk costs in an industry are high, it will?limit competition & decrease?contestability?as firms will be more hesitant to enter
- The lower the sunk costs the?more contestable?the market
- The higher the sunk costs the?less contestable?the market