Contestable Markets | A-Level Economics Notes
These revision notes cover everything you need to know about Contestable Markets for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What is a contestable market?
A contestable market has low or no barriers to entry and exit.
What are barriers to entry?
Barriers to entry are factors that make it difficult for new firms to join a market.
What are barriers to exit?
Barriers to exit are factors that make it difficult or even more unprofitable for a firm to exit a market.
What are four examples of barriers to entry?
There are three main examples of barriers to entry.
- high sunk costs
- economies of scale
- predatory pricing and limit pricing
- brand loyalty
Which market structures are contestable?
There are two market structures that are contestable; perfect competition and monopolistic competion.
Monopolies and oligopolies are not contestable.
What happens to an existing firm in a contestable market?
When a market is contestable, firms cannot make supernormal profits in the long-run. If firms are profitable in the short-run, new firms will enter the market. This means that existing firms will have less market share and less revenue, so they will only be able to make normal profits.
Contestability diagram for A-Level Economics
What is the main advantage of contestable markets?
When markets are contestable, prices will be lower in the long-run in comparison to markets that are not contestable.
What is the main disadvantage of contestable markets?
Markets that are contestable will not be able to achieve dynamic efficiency.
Summary questions
- What is a contestable market?
- What are barriers to entry?
- What are barriers to exit?
- Which market structures are contestable?
- What happens to an existing firm in a contestable market?
- Contestability diagram for A-Level Economics
- What are four examples of barriers to entry?
- What is the main advantage of contestable markets?
- What is the main disadvantage of contestable markets?
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