• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Analyse the characteristics of a contestable market

Extracts from this document...

Introduction

´╗┐Sam Larlham F584: Transport Economics Analyse the characteristics of a contestable market (15 marks) A contestable market operates in a similar manner to one in perfect competition, with one of the key differences being that a contestable market can have any number of firms (as opposed to an infinite number in a perfectly competitive market). This means that, in theory, a contestable market could feature a monopoly or oligopoly, however generally these markets have a relatively large number of firms and therefore a low concentration ratio. The key characteristic of this market that makes it contestable is that there are little or no barriers to entry and exit. In terms of low barriers to entry, this generally means that the market is not heavily regulated and therefore firms need not meet many requirements in order to join it. ...read more.

Middle

At this point, ?hit and run? firms can and will exit the market, due to their low sunk costs meaning they can do so having benefitted from their entry into the market. Conversely, if a firm was operating at an abnormal loss low exit barriers would be enable it to exit the market swiftly to limit its losses (which would of course decrease market supply and cause the price to return to a level of normal profit for the remaining firms). As such, another characteristic is that a contestable market always features potential competition; even if a firm is not being competed with by another in the market, they always perceive competition to be on the periphery. ...read more.

Conclusion

The first is that it is difficult for one firm to have an advantage in its methods of production (be that better technology, better use of labour etc.) as the perfect information allows other firms to achieve this as well. The second is that due to the combination of the two factors, there is a high consumer churn. This means that consumers can easily switch from one producer to another, as perfect information means they are aware of who is offering the best price and a low level of product differentiation means they are buying largely the same product. Therefore if a monopoly was operating at abnormal profit, a small firm could enter the market with a homogeneous product and (provided its price was lower than that of the monopoly) realistically compete and achieve at least normal profit. This explains why a contestable market could have any number of firms. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. Evaluate the role played by barriers to entry in the long run

    of all the qualities in this market that lead to supernormal profits not being able to be retained. In markets where barriers to entry are low, then naturally there are many suppliers and buyers, and information will easily be available all merging to allow companies to product similar innovative products with ease.

  2. what is economics

    o It measures the response to a change in price or any other factors that determine the demand and supply of a product * Elasticity explains things like: o The price of a summer holiday in May or June is around 2/3rds of the price it is in August o

  1. For a duopoly involving homogeneous products, explain and contrast a Cournot, Stackelberg and Bertrand ...

    Therefore firm 1 anticipates firm 2 reaction to its own choice. There is a first mover advantage which results in higher profit for the leader (firm1), over the follower (frim2). Firm 1 needs to choose the output combination on firm 2's reaction curve R2(q1)

  2. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers?

    This graph can be seen below, Figure 9. The entire data are for Tesco's financial years, which run for 52 or 53 week periods to late February. Up to the 27 February 2007 period end, the numbers include non-UK and Ireland results for the calendar year ended on 31 December 2006 in the accounting year.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work