Unit 3: Evaluation of Contestable Markets

Remember, the quality of your evaluation could be the difference between an A* and a B. Please make sure you understand all the following points re contestable markets.

The question you will get will take the following form:

To what degree is the *********** market contestable? (it could be an 8 - 12 marks question)

Points to discuss would be:

There is no such thing as a perfectly contestable market, only degrees of contesability.
Focus on what levels of competition are in the market.
Has there been new entrants to the market/is there a threat of new entrants to the market?
What are the barriers to entry? (are they significant??)
Is there strong brand loyalty in the industry?
What are the barriers to exit (sunk costs)? (are they significant??)
Is there evidence of entry limit pricng?
What level profits are made in the industry? (NB actual amounts mean nothing, what are the profit margins??) The diagram above shows the difference between a market that is not contestable (MC=MR) and perfectly contestable (Normal prifits AC=AR)
Is there evidence of 'Hit and Run'?
Is the industry regulated? (OFCom, OFGem etc)

You would need to focus on some of the above points and decide whether it would be easy/difficult to enter this market. A conclusion would be needed.