4.1.5.9 Contestable markets notes

What does market contestability refer to?

• How easily new firms can enter and exit a market

• The regulatory policies affecting the market

• The profit margins that existing firms enjoy

• The number of products available in the market

Which of the following is a benefit of highly contestable markets?

• Efficiency boost in firms

• Reduced innovation

• Higher barriers to entry

• Increased monopoly power

What impact do contestable markets have on consumer welfare?

• Increased exploitation by dominant firms

• Encouragement of competitive pricing and quality

• Limited consumer choices

• Decreased product quality

How do contestable markets influence innovation?

• They prevent new firms from entering the market

• They lead to a decrease in new product development

• They spur innovation and technological advancement

• They discourage technological advancement

What role does market contestability play in entrepreneurship?

• It has no impact on entrepreneurship

• It discourages new business ventures

• It encourages entrepreneurship and new business ventures

• It increases the financial risks for startups

What are sunk costs?

• Operational costs that are variable

• Costs that have already been incurred and cannot be recovered

• Future expenses that are expected to be incurred

• Profits made from previous investments

What is hit-and-run competition?

• A method to permanently lower market prices

• A long-term market entry strategy

• A strategy where new entrants quickly enter and exit the market

• A regulatory approach to control market entry

How does market contestability mitigate monopoly power?

• By reducing the number of competitors

• By threatening potential competition

• By allowing monopolies to fix prices

• By increasing barriers to entry

What effect does high market contestability have on the pricing strategies of existing firms?

• It leads to higher pricing to cover increased risks

• It forces firms to adopt more aggressive pricing

• It encourages firms to maintain higher prices due to reduced threats

• It promotes competitive pricing to deter new entrants

How do barriers to entry affect the contestability of a market?

• They have no significant impact on market contestability

• They increase market contestability by encouraging more firms to enter

• They decrease market contestability by making it harder for new firms to enter

• They only affect the size of the firms in the market