ILO:

a) Characteristics of contestable markets
b) Implications of contestable markets for the behaviour of firms
c) Types of barrier to entry and exit
d) Sunk costs and the degree of contestability

Characteristics & Behaviour

  • ​must have no barriers to entry or exit
  • have no sunk costs – a firm’s start-up costs that they cannot recover if they exit the market
  • new firms must have no competitive disadvantage compared to the incumbent
  • must have access to the same technology

NB - it has doesn't matter how many firms are in the market!
Y2 26) Contestable Markets

Barriers to entry & exit

Barriers to entry are obstacles that limit a firm’s ability to enter, set up or extend into new markets. Barriers include:

• illegal anti-competitive practices by incumbents, including predatory and limit pricing
• the nature of the business causing barriers to exist, such as economies of scale
• legally imposed barriers –patents, state-owned franchises such as train operating companies and legislation that allows firms to operate such as postal services and 4G licenses.

Barriers to exit are factors that prevent firms leaving a market or, when a firm is making a loss, make it more unprofitable to leave. Examples of this include sunk costs – costs that are irretrievable – such as advertising.

Activity

How would airbnb be an example of increased contestability?
Assess the benefits of this to consumers?
See theory sheet
Kahoot curves revision MCQ
Airbnb and its impact on the UK housing market - BBC Newsnight
Research two examples of Government policy where they have seeked to encourage contestability within the market. Assess the impact of that behaviour for the consumer.
UK accountancy firms face major overhaul under new plans

CMA report shows benefits of BAA break-up