Contestable Markets

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A2 microeconomics revision presentation on contestable markets

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Contestable Markets

  1. 1. A2 MicroContestable MarketsTutor2u, Summer 2013
  2. 2. Contestable marketsWhere an entrant has accessto all production techniquesavailable to existingbusinesses and entrydecisions can be reversedwithout cost
  3. 3. 1. Knowledge of concepts and facts2. Application of knowledge andunderstanding3. Analysis: explain economic theory4. Evaluation: prioritise evidence andarguments; make reasoned judgementsand recommendations; reach andpresent supported conclusionsThe exam tests ............
  4. 4. Build real world examplesinto your notesCommon industries usedinclude food retailers,energy, banks, airlines,technology sectors
  5. 5. Key Contestability FactorsAbsence of sunk costs Access to technologyLow consumer loyalty Size of entry barriers
  6. 6. Contestable Markets?StreamedMovies onDemandRetailCoffeeStoresHome-DeliveredPizzaBudget"Value"HotelsCity Bus andCoachTransportHouseholdMail ServicesFor each ofthe industries,choosewhether theyhave LowContestability(LC) or HighContestability(HC)
  7. 7. Movies on Demand
  8. 8. Contestable Markets?StreamedMovies onDemandRetailCoffeeStoresHome-DeliveredPizzaBudget"Value"HotelsCity Bus andCoachTransportHouseholdMail ServicesFor each ofthe industries,choosewhether theyhave LowContestability(LC) or HighContestability(HC)LCButRising!
  9. 9. Contestable Markets?StreamedMovies onDemandRetailCoffeeStoresHome-DeliveredPizzaBudget"Value"HotelsCity Bus andCoachTransportHouseholdMail ServicesFor each ofthe industries,choosewhether theyhave LowContestability(LC) or HighContestability(HC)HCLCButRising!
  10. 10. Contestable Markets?StreamedMovies onDemandRetailCoffeeStoresHome-DeliveredPizzaBudget"Value"HotelsCity Bus andCoachTransportHouseholdMail ServicesFor each ofthe industries,choosewhether theyhave LowContestability(LC) or HighContestability(HC)HCHCLCButRising!
  11. 11. Contestable Markets?StreamedMovies onDemandRetailCoffeeStoresHome-DeliveredPizzaBudget"Value"HotelsCity Bus andCoachTransportHouseholdMail ServicesFor each ofthe industries,choosewhether theyhave LowContestability(LC) or HighContestability(HC)HCHCHCLCButRising!
  12. 12. Contestable Markets?StreamedMovies onDemandRetailCoffeeStoresHome-DeliveredPizzaBudget"Value"HotelsCity Bus andCoachTransportHouseholdMail ServicesFor each ofthe industries,choosewhether theyhave LowContestability(LC) or HighContestability(HC)HCHCHCLCLCButRising!
  13. 13. Contestable Markets?StreamedMovies onDemandRetailCoffeeStoresHome-DeliveredPizzaBudget"Value"HotelsCity Bus andCoachTransportHouseholdMail ServicesFor each ofthe industries,choosewhether theyhave LowContestability(LC) or HighContestability(HC)HCHCHCLCButRising!LCLCButRising!
  14. 14. Great diagrams lift yourscript!Poor ones testexaminer patienceDiagrams must be big
  15. 15. Cost & PriceOutput (Q)Pricing in a Contestable Market – Some AlternativesCost & PriceOutput (Q)Highly Contestable Market –Profit Maximising OutputHighly Contestable Market –Pricing to Maximise RevenueACARMRMCACARMRMC
  16. 16. Cost & PriceOutput (Q)Pricing in a Contestable Market – Some AlternativesHighly Contestable Market –Profit Maximising OutputACARMRMCIn the left handdiagram draw inthe profitmaximising outputand price (label itQ1 and P1.)Q1P1C1Price > Average CostSupernormal profitsHigh profits sendsignals to othersuppliers
  17. 17. Cost & PriceOutput (Q)Pricing in a Contestable Market – Possible Long Run Equilibrium?Highly Contestable Market –Profit Maximising OutputACARMRMCIn the long run ifthe market is highlycontestable whichlevel of price andoutput is probable?(Label this Q2 andP2).Q1P1C1When AC = AR,normal profits made,a return sufficient tokeep factor inputs intheir present useP2Q2
  18. 18. Pricing in a Contestable Market – Some AlternativesCost & PriceOutput (Q)Highly Contestable Market –Pricing to Maximise RevenueACARMRMCIn the right handdiagram show theprice and outputfor a firm thatseeks to maximisetotal revenue
  19. 19. Pricing in a Contestable Market – Some AlternativesCost & PriceOutput (Q)Highly Contestable Market –Pricing to Maximise RevenueACARMRMCIn the right handdiagram show theprice and outputfor a firm thatseeks to maximisetotal revenueP1Revenue maximisedwhen marginalrevenue = zero
  20. 20. Pricing in a Contestable Market – Some AlternativesCost & PriceOutput (Q)Highly Contestable Market –Pricing to Maximise RevenueACARMRMCIn the right handdiagram show theprice and outputfor a firm thatseeks to maximisetotal revenueP1C1Revenue maximisedwhen marginalrevenue = zeroStill some supernormal profits madeLower price andhigher output thanMC=MRRevenue max meansa lower profit marginis made – usuallygood for consumerwelfare – but profithas value too!
  21. 21. Hit and Run EntryEntry to a market in hope of an immediate profitAbsence of sunk costs makes this easier!
  22. 22. Strong brands can make it easier to enter a new market!
  23. 23. Examples of Exit BarriersAsset write-offs Lost consumer goodwill Redundancy costsCostsExit costs can be animportant barrier tocontestability inmarkets – manystudents ignore them!
  24. 24. Get help from fellowstudents, teachers andtutor2u on Twitter:@tutor2u_econ

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