Contestability
Conditions for a contestable market
Low barriers to entry or exit
Large pool of potential entrants
Good market information available
Incumbent firms are subject to “hit and run” competition
Technology and Contestability
Reduced barriers to entry and exit
Business don't have to be physical anymore, this reduces start up costs and sunk costs
Firms can hire less workers
Technical economies of scale are easier to achieve.
Adverting is easier
Increases pool of potential entrants
Technology allows for greater innovation, firms can come in with something new to disrupt markets
Firms can find cheaper ways to produce things, new firms don't have to be offering something new but can do it a lower price as technology can reduce cost of production
Increased information
Internet
Communication
Pros and Cons
Cons
Pros
Allocative efficiency
Lower prices
Higher consumer surplus
Higher quantity and quality
More choice
Productive efficiency
Exploitation of economies of scale
Lower costs
X-efficiency
Less waist
Lower prices for consumers
Job creation
Higher quantity
Labour is a derived demand
Lack of dynamic efficiency
Cost cutting in dangerous areas
Creative destruction
Safety of product
Environmental safety
New firms destroy existing firms
Job losses
Anti competitive practices