3.4.7 Contestable markets

• Contestable markets are markets where firms can enter and exit easily and quickly, with minimal barriers to entry
• The actual number of firms in a contestable market is the primary driver of prices and market behavior.

  False
• Match the characteristic with its description:

  Low sunk costs ↔️ Costs that cannot be recovered upon exit

  Minimal regulatory restrictions ↔️ Few government rules hindering entry and exit

  Ease of access to key resources ↔️ Availability of materials, labor, and technology
• Order the market structures from most to least competitive based on pricing behavior:

  1️⃣ Perfect Competition

  2️⃣ Contestable Market

  3️⃣ Monopoly
• In a contestable market, prices tend towards average cost.
• In a monopoly, prices are set above marginal cost
• Contestable markets benefit consumers through lower prices and improved services.
• Actual competition refers to the existing rivalry among firms in a market based on price, product differentiation, and marketing strategies
• Potential competition acts as a constraint on incumbent firms' behavior, even if new firms haven't entered the market.
• Low barriers to entry encourage new firms to enter, enhancing market contestability
• Barriers to entry and exit are minimal in contestable markets.
• Sunk costs are costs that cannot be recovered upon exit
• Reduced barriers in contestable markets incentivize firms to operate efficiently and innovate.
• What is the definition of a contestable market?

  Low barriers to entry
• Contestable markets are characterized by low sunk costs
• Minimal regulatory restrictions are a key characteristic of contestable markets.
• What type of resource access is essential in contestable markets?

  Ease of access
• Contestable markets have few to many firms, low barriers to entry, and competitive pricing behavior that tends towards average cost
• In perfect competition, prices are determined by marginal cost.
• What type of pricing behavior is observed in a monopoly?

  Prices above marginal cost
• Match the market structure with its characteristics:

  Contestable Market ↔️ Low barriers to entry

  Perfect Competition ↔️ P = MC

  Monopoly ↔️ High barriers to entry
• What is the driving force behind potential competition?

  Barriers to entry
• Low barriers to entry enhance potential competition
• Sunk costs are recoverable upon exit in contestable markets.

  False
• What is the typical pricing behavior in contestable markets?

  Prices near average cost
• Contestable markets encourage both operational and allocative efficiency
• Contestable markets result in higher consumer welfare.
• Match the market structure with its pricing behavior:

  Contestable Market ↔️ Prices near average cost

  Perfect Competition ↔️ P = MC

  Monopoly ↔️ Prices above marginal cost
• What is the primary difference between contestable and perfectly competitive markets in terms of barriers to entry?

  Low versus no barriers
• Technology promotes contestability by lowering barriers to entry
• What pricing behavior is characteristic of perfect competition?

  $P =$$MC$
• Technology lowers barriers to entry
• E-commerce platforms reduce startup costs for new firms.
• What advantages do data analytics and AI provide in contestable markets?

  Operational efficiency and innovation
• Increased contestability leads to better consumer options and lower prices.
• Contestable markets have minimal barriers to entry
• What are sunk costs in the context of contestable markets?

  Costs that cannot be recovered
• Minimal regulatory restrictions are a key characteristic of contestable markets.
• What is the pricing behavior in perfect competition?

  $P =$$MC$
• Contestable markets benefit consumers with lower prices