- Contestable market
- A contestable market is one that new firms can enter freely and leave at little cost, so the firms already in it face the threat of competition.
- Sunk costs
- Sunk costs are costs that were incurred in the past and cannot be recovered.
Features of a contestable market
Can you name the three features of a perfectly contestable market?
The more of these a market has, the more contestable it is.
Free entry means a new firm faces no legal, technical or cost barrier that the firms already in the market did not face when they started.
Can you think of an example?
Anyone can open a food stall at a weekend market by renting a pitch. The stallholders already there have no licence or patent that a newcomer lacks.
Low sunk costs mean that little of what a firm spends to enter is lost if it leaves, because its assets can be sold or used elsewhere.
Can you think of an example?
An airline starting a new route leases its planes. If the route fails, it moves them to another route, so little of its outlay is lost.
Access to the same technology means a new firm can produce at the same cost as the firms already there, with no secret process or patent to hold it back.
Can you think of an example?
A new courier firm can buy the same vans and the same route-planning software as the big carriers, so its cost per parcel can match theirs.