Contestable markets
Contestable markets are characterized by low barriers to entry and exit, allowing new firms to enter and compete with existing firms. In these markets, the threat of potential competition can drive existing firms to operate more efficiently and keep prices low. This concept challenges the traditional view that market power is solely determined by the number of firms in a market.
5 Key excerpts on "Contestable markets"
eBook - ePub- Peter Curwen, Peter Else(Authors)
- 2006(Publication Date)
- Routledge(Publisher)
...Any contestable market must exhibit the ideal behaviour to be expected under perfect competition. Hence two competitors are sufficient to trigger off contestable market behaviour. A final critical point to be made by way of introduction to Contestable markets is that, whereas traditional models start out by taking the structure of an industry as exogenously given, and then proceed to investigate how each structure affects the determination of prices, output and so forth, the contestable market model assumes that each industry’s structure is determined endogenously by technical conditions reflected in the cost functions of firms.. Entry and exit characteristics As denoted in Table 15.1, there are no entry barriers in a contestable market. This is to be taken to mean not simply that entry is necessarily costless, but rather that an entrant can produce products that consumers will treat as comparable to those of incumbent firms with respect to such matters as quality, and that the existing price levels are sufficiently attractive as to suggest to the potential entrant that he can make a worthwhile profit. In other words, the entrant must be able to operate with a cost structure comparable to that of incumbent firms and cannot be prevented from attaining it. In addition, there must be absolute freedom of exit in a contestable market so that any entry costs can always be recouped when a firm leaves the industry. A critical requirement here is the absence of sunk costs, which are costs that cannot be recovered on exit from the industry. For example, mining operations involve considerable initial expenditures on the drilling of mine shafts, tunneling and the like, which cannot, in most cases, be recovered on exit from the industry because the facilities created have little value in alternative use. It is physically impossible to transfer them to another site and they are unlikely to have any value in alternative uses on their existing site...
eBook - ePubMarkets for Managers
A Managerial Economics Primer
- Anthony J. Evans(Author)
- 2014(Publication Date)
- Wiley(Publisher)
...by market concentration), but one that is contestable. In other words, providing new entrants are able to challenge for the profits being generated by incumbents, the market is competitive. If we define a monopoly as ‘an enforceable property right in a product or market share’ 21 then we see that it's an extra-market phenomenon. Monopolies can only persist if legally protected. Since the barriers to entry and exit are due to government regulations, their only responsibility in providing a ‘competitive market’ is refraining from restrictions on businesses. Remarkably, according to this view, regulation and competition policy are not ways to control monopolies – they're the reason monopolies exist! In fact regulations can be counterproductive since they raise the cost of doing business, offering an advantage to existing firms, or larger ones who can afford legal advice and regulatory expertise. When entry is free we get the good results regardless of the situation with market share. It's important to make a clear distinction here between barriers to entry and costs of entry. In particular: Costs of entry are an important part of the market process. Since they reflect real scarcities they provide a market test for potential entrepreneurs and in doing so prevent resources being wasted. They are an unavoidable constraint. Barriers to entry are imposed upon a market process. Because they are a political phenomenon they are unrelated to the cost (in terms of resources used) of a particular product. Unlike costs of entry, barriers can prevent value-added enterprises from satisfying unmet needs. They are an unnecessary obstacle. In the UK more than 90% of motorway service stations are operated by just four companies – Extra, Moto, Roadchef and Welcome Break. But this lack of competition is the result of barriers to entry...
eBook - ePub- Enrico Colombatto(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...Unfortunately, these doubts cannot be answered without resorting to value judgements or arbitrary conjectures about the way the marketplace could evolve in the future, which is necessarily uncertain. Yet, one could also take a more radical step and think of competition in a totally different way. To this alternative we now turn our attention. In sections 5.3 and 5.4 we remarked that the merits of competition are traditionally assessed by considering the outcomes it generates. Yet as we learned at the beginning of this book, the economic way of thinking is about processes, rather than outcomes. Put differently, the economic way of thinking takes for granted that individuals strive to improve their well-being and that, in order to pursue this goal, they exchange, take advantage of opportunities, and innovate by creating new knowledge and discovering new ways of producing valuable goods and services. All this implies that there can be no pre-established, desirable outcome. Because individuals always want more – for example, more leisure, more purchasing power, more comfort – each outcome is merely an intermediate step on the way towards something else. Hence, the essence of economics is not the description of the features of those intermediate steps (outcomes). Rather, it is the explanation of individual behaviour when human beings move from one intermediate step to the other. Like economics, competition is also about processes. In particular, competition describes how producers attempt to beat their competitors and meet buyers’ needs. In this light, freedom to compete – the liberty to decide how to outdo competitors and meet consumers’ demands – consists in the freedoms of exit and entry. Freedom of exit means that the owners’ decisions to stay in or leave the market should not be influenced by government intervention, e.g. by subsidies provided to ailing companies or industries...
eBook - ePub- Israel M. Kirzner(Author)
- 2015(Publication Date)
- University of Chicago Press(Publisher)
...Competition, in the process sense, is at least potentially present so long as there exist no arbitrary impediments to entry. So long as others are free to offer the most attractive opportunities they are aware of, no one is free from both the urge and the need to compete. Only when one is aware that others, despite the possibility of their offering something more attractive to the market, will be barred from doing so can one feel secure from competition. The competitive process depends entirely on the freedom of those with better ideas or with greater willingness to serve the market to offer better opportunities. Every arbitrary impediment to entry is a restriction on the competitiveness of the market process. The importance of freedom of entry for the competitiveness of the market has of course not gone unnoticed, especially in recent years. Especially in the context of what in the dominant terminology has been called imperfect competition, the role of entry has been explored extensively. 15 The importance of potential competition has frequently been acknowledged. And even within the context of competition in the neoclassical sense, competition came, not entirely understandably, to be associated with freedom of entry. As Triffin has remarked, the “traditional theory of competition was built upon two independent assumptions, needlessly jumbled together: the lack of influence of the seller upon his price, and free entry.” It was, in Triffin’s view, the great merit of “modern theory” that it “isolated the first assumption in its definition of pure competition.” 16 From the point of view of this book I appraise Triffin’s judgment as follows. Triffin is perfectly consistent in objecting to the “traditional” jumbling together of the two assumptions, the lack of seller’s influence upon price and free entry...
eBook - ePubIntermediate Microeconomics
Neoclassical and Factually-oriented Models
- Lester O. Bumas(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...(2) Brilliant advertising slogans, songs, and cartoon characters can be developed. The “Joe Camel” advertisements were so popular that they were banned in the mid-1997 negotiations between thirty attorney generals and the cigarette manufacturers. (3) Other forms of non-price competition may be under the table and unknown to rivals. Salespeople may have the authority to grant longer periods to pay for a product to valued customers and potential customers—with the understanding that the concession is top secret. (4) Warranties can be made less restrictive and longer in duration. Although this is easy to replicate, it might be too risky and costly to do so for a firm which fears the potential costs of the improvement. The evidence in support of the relative preference of business for non-price rather than price competition rests on the more frequent occurrence of the former and the frequent absence of the latter. Barriers to Entry High barriers to entry deter new firms from entering a market and, therefore, allow the maintenance of an oligopolistic market and the monopoly power of its strongest members. Some of the most important barriers are: economies of scale, financial requirements, the control of special resources, and special know-how. Economies of Scale A small set of resources can suffice for the production of a modern retail store, dentist’s office, pizza parlor, and carpenter’s shop. But much is required to run an automobile factory, an integrated steel mill, or a nuclear power plant. The difference is largely due to the fact that the production process of the former do not involve economies of scale while the latter do. Assembling cars in a plant the size of a pizza parlor would create costs so high that cars would become un-affordable. The usual measure of the scale required for a certain form of production goes by the name minimum efficient size...
