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Choosing a utility industry such as telecommunications or water industry, explain the factors, which may affect the contestability of the market.

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Introduction

SECTION B - ECONOMICS QUESTION (a) Choosing a utility industry such as telecommunications or water industry, explain the factors, which may affect the contestability of the market. A contestable market is a market where an inefficient firm or firms, which is earning excess profits, is likely to be driven out by more efficient or less profitable rival. A market can be contestable even if a single firm, which appears to enjoy a monopoly with market power, dominants it and the new entrant exists only as potential competition. The threat posed by the new entrants in the market is taken to be a key reason for the firm's behaviour in the market. There are many factors that can affect the contestability of the market. The number of firms in the market can change the contestability of the market. If there are many firms in a market the market is known to be contestable. As for the water industry the number of firms in the market are very few and most of these firms take most of the market share. ...read more.

Middle

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. ...read more.

Conclusion

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. SOHAIL KHAN ...read more.

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