| What is Contestability? | -Refers to how Open a Market is for New Competitors to Enter - even if not Actual Competition Exists |
| What is Present in a Contestable Market? | -Barriers to Enter/Exit is Low. If there is Supernormal Profit then New Firms will Enter
-Supernormal Profits can be Made in the Short Run for the New Firm potentially. |
| What can the Threat of Contestable Rivals do to Incumbent Firms? | -Incumbent Firms will try to Set Prices that will not lead to Vast Supernormal Profit in order to not Incentivise Competition in the Industry |
| How can Barriers to Entry be made Higher? | -Patents on Key Products or Production Methods. Essentially it Legally Protects the Firm against Rivals from Copying its Homework
-Advertising by Incumbent Firms to create Brand Loyalty
-Threat of Predatory Pricing by Incumbent Firms. If New Competitors see a 'Price War' then they may not Enter the Market. The lower Prices affects the New Competitors more
-Trade Restrictions (Tariffs or Quotas) restricting Foreign Competition in Domestic Markets
-Incumbent Firms Vertically Integrate - Access to Suppliers making it Hard for New Competitors
-Sunk Costs (Barrier to Exit) high. Sunk Costs relates to Costs not able to be Recovered when the Firm exits the Industry ie Specialised Equipment or Advertising. If Sunk Costs are high, it again Disways Competition |
| What are Hit-and-Run Tactics in Contestable Markets? | -Low Barriers to Entry and Exit can get Firms to Enter the Market during a Supernormal Profit era, and Leaving when Prices have dropped to Normal Profit era
-As long as the Profit made is Greater than the Entry and Exit costs, the Firm can Compete |
| What does Contestability Markets do to Incumbent Firms? | -The Threat of Increased Competition (and Actual Competition) can affect the Incumbent Firm's Behaviour.
-Incumbent Firms, knowing what High Supernormal Profits can lead too, can set Prices at a Lower Level to not allow New Entrants
-Barriers to Entry be set Higher if they can. This can Involve Advertising or that it would be Willing to engage in a Price War (Must be within the Law)
-In the Long Run, Firms in a Contestable Market will become more Productive and Allocative Efficiency, as Supernormal Profit has Shifted to Normal Profit |
| What is the difference between Invention and Innovation? | -Invention refers to making something New
-Innovation refers to a Change to a Product or Process that Exists already |
| What Impact can Technological Change have? | -Structure of the Market
-Production Methods
-Consumption of Goods and Services |
| What can Invention and Innovation lead to? | -Better Capital Equipment, allowing Improved Quality of Goods made
-Barriers to Entry being made Higher or Lower. If a Cheaper Method exists, it can Reduce Barriers to Entry, but also Increase the Capital Expenditure, which Increases Barriers to Entry
-Level of Monopoly Power for the First Firm that Uses the New Invention / Innovation
-Better Labour Productivity and Efficiency
-More Economics of Scale |
| What is Creative Destruction? | -The idea that Markets are always Changing and Evolving because of Innovation and Invention of new Products and Processes
-This can Destroy Markets and Create New ones |
| What can Creative Destruction lead to? | -Job Losses because of Markets being Destroyed, but New Jobs in the Long Run are also created, with Society Benefitting due to Better Goods and Services
-Technological Change generally leads to Creative Destruction. Incumbent or New Firms can make a Goods that is Much Better than Existing Ones, altering the Market Structure |
| Use the Development of Rail and Motorways in the UK to explain why Monopoly Power can change due to Creative Destruction | -The 19th Century in the UK saw Firms use Rail to Transport Freight rather than Canal. This Destroyed the Monopoly Power of the Canal Owners
-The Development of Motorways and Lorries has Destroyed the Monopoly Power of Railway Owners in turn |
| Why is Technological Change very Important therefore to how Firms Behave? | -Technological Change can impact even the Largest Firms, as Innovative New Firms can be Attracted to Industries with large Supernormal Profits.
-Therefore the Incumbent Firms have an incentive to keep Inventing and Innovating, in order not to Fall Behind and to keep Barriers to Entry High
-This helps the Consumer, as they enjoy Better Quality etc... |
