The ease of entry of the firm in the market can also affect the contestability of the market. This is linked direct to the barriers of entry. The market structure for the water industry is a oligopoly. This means that the barriers to enter this market are very high. Barriers to entry are barriers that prevent a firm from entering that particular market. For this particular the barriers to entry are start up costs, patents and advertising etc. If the barriers to entry for a firm are low then this will mean that it will make firms easily to enter the market making a contestable market, but for the water industry the barrier to entry are high making it a highly incontestable market. If a new firm does enter the market the current firms may try to push out the firm due to the fear of competition. They may do this by lowering their prices making it difficult for the new entrant to operate. This may lead to the new entrant in the market to leave as it has high costs as it come into the market. Also as the other company currently in the market is established it might be too costly for the new entrant to establish and gain reputation.
The market knowledge is another factor that can affect the contestability. Perfect knowledge to the consumer of the market will mean that the market is perfectly contestable. But this can only occur in a perfectly competitive market but in an oligopoly market the knowledge is not perfect making it unlikely contestable.
Collusions may also lead to the market becoming highly incontestable. Collusion is when two firms get together to restrict competition. This might mean the in the water industry two companies might think of joining up so that they don't have to compete with each other but take their own proportion of the market share. In the long run firms benefit. This might help the firm gain monopoly power in the market and gain abnormal profits.
Cartels are another factor that can lead to the market to be highly incontestable. A cartel is when a group of firms in the market get together and try to restrict the competition in the market. They may do this by many different ways. The first way can be to increase the barriers to entry of the market so that firms find it very risky to enter the market in the first place.
- Assess the case for and agains abolishing the agency, such as OFTEL or OFWAT, which is currently responsible for regulating the industry.
There are many reasons why not to abolish agencies such as OFTEL or OFWAT. Agencies such as OFTEL and OFWAT are a public body established to regulate and examine the market to see if competition is taken place. The agencies inquiries into mergers, markets and the regulation of the major regulated industries, undertaken in response to a reference made to it by another authority.
There are many advantages of a doing this. The first advantage is that the business makes sure that competition is taken place in the market. The agencies will regulate the market to see if companies aren’t dominating the market and are allowing competition to take place. The advantage of this is that more firms will be able to compete which will allow firms in the market to become more efficient in production and increase the quality of the products. This is best for the consumer because as there is competition this will mean that the prices will be low giving the consumer more of a better price. It will give more of a choice to the consumer if competition is taking place.
The other advantage is the business makes sure that no monopolies arise. The competition commission can do this by looking at the market share that each business has. In the UK a business with over 25% of the market share is classified as a monopoly. Monopolies are the main cause to market failure as the firm dominating the market produces inefficiently. These firms are price givers, they make the prices for the customers and as the product being sold is unique the customers have no choice but to buy the product at that price. This type of structure has high barriers to entry disallowing other firms from entering the market. As there are fewer firms the prices are high and the consumer choice is reduced leading to market failure. So the competition commission try to reduce this by intervening and disallowing this to take place and restoring competition.
