Contestable Market Theory

Contestable market theory suggests that markets with low entry and exit barriers lead to high competition among firms. Key characteristics include freedom of entry and exit, absence of irrecoverable costs, and equal access to technology. New entrants often use hit and run tactics to gain temporary advantages, keeping existing firms vigilant. The theory emphasizes that potential market value attracts new competitors, maintaining a dynamic competitive environment.

What is a key factor that drives competition in a contestable market?

• Potential threat of new entrants

• High barriers to entry

• Lack of technology access

• Stable market conditions

Which of the following is NOT a characteristic of a contestable market?

• Freedom of entry and exit

• Low barriers to entry

• Equal access to technology

• High irrecoverable costs

In which industry is equal access to technology commonly observed?

• Textile

• Pharmaceuticals

• Automobile manufacturing

• Real estate

What strategy do new entrants often use in contestable markets to gain a temporary advantage?

• Brand loyalty programs

• Hit-and-run tactics

• High pricing strategy

• Long-term investment

Why is it challenging to establish a long-term competitive advantage in a contestable market?

• Market conditions are stable

• Lack of consumer interest

• Competitors react quickly to new entrants

• High initial investment is required