Contestable Markets Homework Help

What are Contestable Markets?

A contestable market is e one in which a person has all the freedom to enter the market, produce what he wants to, and leave it if he feels like it.

There are no restrictions in the market. This is what is the general idea tried to be conveyed by the concept of the contestable market. The new entrants are free to contest in the market. That is why the name is given to the contestable market.

Essentials for a Contestable Market’s Existence

It is essential that the market follow certain things to make a contestable one. These would be the following:

  1. Not many barriers should be there for entry of a new firm. This would also enhance the existing competition in the market and it would give fresh competition.
  2. The entry of the firm or the exit from the market should totally be cost-free.

What Is the Real Scenario?

Though the above-mentioned factors would be an ideal thing to be doing, the market is not actually the same in reality. These are the things that are actually seen in the real market setup:

  1. Barriers are always there in the field for contestability.
  2. A monopoly position in the market would be a tougher task to break.
  3. Performance in the market tends to change in this case.

Perfect Competition

There is one other important thing that one should be aware of in the case of these contestable markets. It is called the perfect competition. They are those markets where there are certain powers that a firm can actually have in the market scenario. This is because of the following reasons:

  1. Monopoly in the field: This is the case where it becomes tough for a new firm to make its mark in the contestable market.
  2. This would lead to the setting up of prices. This is also very much common in the case of the market scenario for a new firm to bear.

There are conditions that would make this scenario a perfect competition one. They would be as follows:

  1. There is perfect information being supplied by the supplier about the product in the market. This tends to make it superior.
  2. Freedom: These days there is no restriction on how to market your product. Thus advertisements make it a perfect competition scenario.
  3. Sunk costs: it is very important to know that if there are no sunk costs involved in the field, then there are no risks at all.