Contestable markets (OCR A-Level Economics): Flashcards
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14 cards from this deck
Contestable market
Contestable market
Market with no barriers to entry/exit; allows free competition
Key principle of contestable market theory
Key principle of contestable market theory
Potential competition, not actual competition, drives behaviour
Economist who proposed contestable market theory
Economist who proposed contestable market theory
William Baumol
Traditional theory: what determines competitiveness
Traditional theory: what determines competitiveness
Number of firms in the industry
Barriers to entry/exit in contestable markets
Barriers to entry/exit in contestable markets
Minimal or no barriers
Sunk costs
Sunk costs
Costs that cannot be recovered once incurred
Level of sunk costs in contestable markets
Level of sunk costs in contestable markets
Low or nonexistent
Hit-and-run entry
Hit-and-run entry
Firms enter, profit, and exit quickly if conditions change
Knowledge in perfectly contestable market
Knowledge in perfectly contestable market
Perfect knowledge of prices, costs, and technology
Productive efficiency occurs when
Productive efficiency occurs when
Firm produces at lowest cost (minimum )
Why contestable markets promote productive efficiency
Why contestable markets promote productive efficiency
Threat of entry forces firms to minimise costs
Allocative efficiency definition
Allocative efficiency definition
Resources allocated to maximise consumer satisfaction
Allocative efficiency condition
Allocative efficiency condition
Price equals marginal cost ()
Outcomes of contestable markets
Outcomes of contestable markets
Lower prices, higher quality, greater efficiency