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24:[["$","$L33",null,{"feature":"flashcards"}],"$L34",["$","$L35",null,{"href":"/a-level/economics/edexcel/a/contestability/flashcards","label":"3.4.7 Contestability","subjectCode":"a_level_economics__edexcel_a","surface":"flashcards"}],["$","$L36",null,{"runner":["$","div",null,{"className":"min-h-0 flex-1 overflow-hidden bg-background","children":["$","$L37",null,{"decks":[{"id":"69d09e0a-bed6-40e2-8cdb-89691858b00f","title":"3.4.7 Contestability Flashcards","topicId":"a5263507-4afb-5bfa-a9a7-4db283774d15","topicSlug":"contestability","cards":[{"id":"b23e2596-60d7-408d-8db9-1b82e14168f5","cardType":"cloze","points":null,"front":"A [ ] is disciplined by the threat of new entry, not the number of existing firms.","back":"A contestable market is disciplined by the threat of new entry, not the number of existing firms.","mcqOptions":[{"text":"contestable market","correct":true,"explanation":"A contestable market is constrained by potential competition: credible entry and exit pressure incumbents to keep prices low and operate efficiently, even when few firms currently supply the market."},{"text":"concentrated market","correct":false,"explanation":"Concentration describes market share distribution, not discipline from potential entry. The correct term is contestable market because the credible threat of new competitors constrains incumbent behaviour."},{"text":"competitive market","correct":false,"explanation":"A competitive market usually refers to rivalry among existing firms. The correct term is contestable market, where the possibility of entry disciplines firms regardless of the current number of suppliers."},{"text":"collusive market","correct":false,"explanation":"Collusion involves firms coordinating to reduce competition rather than being disciplined by possible entry. A contestable market is constrained by the credible threat that new firms will enter."}]},{"id":"295642e4-eca8-4850-bf9d-e17173de18fe","cardType":"cloze","points":null,"front":"[ ] cannot be recovered when a firm leaves a market.","back":"Sunk costs cannot be recovered when a firm leaves a market.","mcqOptions":[{"text":"Sunk costs","correct":true,"explanation":"Sunk costs are expenditures that cannot be recovered upon market exit. Their size therefore affects how risky entry is and how easily firms can undertake hit-and-run competition."},{"text":"Variable costs","correct":false,"explanation":"Variable costs change with output and are avoided when production stops, so they are not necessarily irrecoverable. Sunk costs are specifically the costs that cannot be recovered on exit."},{"text":"Fixed costs","correct":false,"explanation":"Fixed costs do not vary with output, but some fixed assets can be resold and their value recovered. Sunk costs are the irrecoverable portion of an entrant’s expenditure."},{"text":"Opportunity costs","correct":false,"explanation":"Opportunity cost is the value of the next-best alternative forgone, not an irrecoverable payment. Sunk costs are actual past expenditures that cannot be recovered when leaving a market."}]},{"id":"66bc5832-efdb-47a1-91f2-4791f879342f","cardType":"basic","points":1,"front":"What chiefly determines a market's degree of contestability?","back":"The level of sunk costs.","mcqOptions":[{"text":"The level of sunk costs.","correct":true,"explanation":"Sunk costs chiefly determine contestability because low irrecoverable expenditure makes entry and exit less risky, increasing the credibility of potential competition and hit-and-run entry."},{"text":"The level of fixed costs.","correct":false,"explanation":"Fixed costs are not necessarily irrecoverable because assets may be resold. Contestability chiefly depends on sunk costs, since these determine what an entrant risks losing upon exit."},{"text":"The level of market demand.","correct":false,"explanation":"Demand affects potential revenue but does not chiefly determine whether firms can enter and leave freely. The decisive factor is the level of sunk costs associated with entry."},{"text":"The level of existing competition.","correct":false,"explanation":"Counting existing competitors confuses contestability with market concentration. Contestability chiefly depends on sunk costs because potential entry can discipline incumbents even when only one firm currently operates."}]},{"id":"97a040b4-2395-4eb6-85fb-467ff25eb08d","cardType":"basic","points":2,"front":"Why might a single incumbent behave competitively?","back":"High prices could attract new entrants.","mcqOptions":[{"text":"High prices could attract new entrants.","correct":true,"explanation":"A lone incumbent may price competitively because high prices and supernormal profit signal an opportunity to entrants. Credible potential competition therefore constrains behaviour without requiring existing rivals."},{"text":"High prices could attract government subsidies.","correct":false,"explanation":"Governments do not generally subsidise firms because an incumbent charges high prices. The competitive discipline comes from new entrants being attracted by the prospect of earning supernormal profit."},{"text":"High prices could attract higher sunk costs.","correct":false,"explanation":"Sunk costs arise from irrecoverable expenditure and are not attracted by high prices. High prices instead attract new entrants seeking profit, which pressures the incumbent to behave competitively."},{"text":"High prices could attract consumer loyalty.","correct":false,"explanation":"Higher prices do not normally generate consumer loyalty and may reduce demand. They can attract new entrants by revealing supernormal profit, creating a credible competitive threat to the incumbent."}]},{"id":"7c57b739-a64e-4898-b053-498eb6b40e18","cardType":"basic","points":3,"front":"What conditions are required for perfect contestability?","back":"

Freedom of entry and exit
No sunk costs

","mcqOptions":[{"text":"

Freedom of entry and exit
No sunk costs

","correct":true,"explanation":"Perfect contestability requires firms to enter and leave without barriers and to recover all relevant expenditure on exit. This makes rapid hit-and-run entry fully credible."},{"text":"

Freedom of entry but not exit
High sunk costs

","correct":false,"explanation":"Restricted exit and high sunk costs expose entrants to irrecoverable losses, undermining potential competition. Perfect contestability instead requires freedom of both entry and exit with no sunk costs."},{"text":"

Restricted entry and exit
No fixed costs

","correct":false,"explanation":"Restrictions on entry and exit directly prevent perfect contestability, while fixed costs may still be recoverable. The required conditions are free entry and exit and no sunk costs."},{"text":"

Freedom of entry and exit
No variable costs

","correct":false,"explanation":"Variable costs need not be zero because they can be avoided after production ceases. Perfect contestability requires freedom of entry and exit together with no irrecoverable sunk costs."}]},{"id":"2bbae7d0-d633-42af-81d1-6cab8cbae489","cardType":"basic","points":1,"front":"Where do real markets lie on the contestability spectrum?","back":"They lie between the extremes; perfect contestability is rare.","mcqOptions":[{"text":"They lie between the extremes; perfect contestability is rare.","correct":true,"explanation":"Contestability is a spectrum because real markets have barriers and sunk costs of differing degrees. Completely costless entry and exit are unusual, making perfect contestability rare."},{"text":"They lie at the contestable extreme; perfect contestability is common.","correct":false,"explanation":"Real firms usually face at least some sunk costs or entry and exit barriers, so perfect contestability is uncommon. Most markets lie between perfectly contestable and wholly uncontestable extremes."},{"text":"They lie at the uncontestable extreme; partial contestability is rare.","correct":false,"explanation":"This overlooks variation in the strength of market barriers. Most real markets face some potential entry but are not perfectly open, placing them between the two extremes."},{"text":"They lie outside the spectrum; perfect contestability is impossible.","correct":false,"explanation":"Real markets can be assessed by their degree of contestability even when the perfect model is not met. They generally lie between the extremes rather than outside the spectrum."}]},{"id":"24b645d9-1e1a-4f76-860a-0e78753951e3","cardType":"cloze","points":null,"front":"Hit-and-run entry aims to [ ], then leave before the incumbent can retaliate.","back":"Hit-and-run entry aims to capture short-run supernormal profit, then leave before the incumbent can retaliate.","mcqOptions":[{"text":"capture short-run supernormal profit","correct":true,"explanation":"A hit-and-run entrant enters when incumbents offer supernormal profit, captures that profit briefly, and exits before retaliation. Low sunk costs make this temporary strategy financially credible."},{"text":"capture long-run normal profit","correct":false,"explanation":"Earning normal profit over the long run implies remaining in the market rather than making hit-and-run entry. The strategy targets short-run supernormal profit before an incumbent can retaliate."},{"text":"eliminate short-run economic profit","correct":false,"explanation":"Potential entry may eventually erode an incumbent’s profit, but the entrant’s aim is not to eliminate profit. It enters to capture short-run supernormal profit for itself."},{"text":"capture long-run monopoly profit","correct":false,"explanation":"Long-run monopoly profit would require sustained market power and continued operation, contradicting a rapid exit. Hit-and-run entry seeks short-run supernormal profit before incumbent retaliation occurs."}]},{"id":"da029f83-42e5-4088-9f7c-4bf7a9d3edd3","cardType":"cloze","points":null,"front":"Hit-and-run entry aims to capture short-run supernormal profit, then leave [ ].","back":"Hit-and-run entry aims to capture short-run supernormal profit, then leave before the incumbent can retaliate.","mcqOptions":[{"text":"before the incumbent can retaliate","correct":true,"explanation":"Hit-and-run entrants leave before incumbents can respond through measures such as price reductions. Rapid exit protects the temporary profit gained from exploiting a briefly attractive market opportunity."},{"text":"after the incumbent has retaliated","correct":false,"explanation":"Waiting until after retaliation could expose the entrant to lower prices and losses. Hit-and-run entry requires leaving before the incumbent can respond effectively to the competitive threat."},{"text":"before the entrant earns any profit","correct":false,"explanation":"Exiting before earning profit would defeat the purpose of hit-and-run entry. The entrant first captures short-run supernormal profit, then leaves before the incumbent can retaliate."},{"text":"after the market reaches equilibrium","correct":false,"explanation":"A hit-and-run entrant does not wait for a new long-run equilibrium because competitive adjustment could remove supernormal profit. It exits before the incumbent has time to retaliate."}]},{"id":"ac37b046-f2e6-4e9d-9a48-745111d441bc","cardType":"basic","points":2,"front":"Why do low sunk costs make hit-and-run entry credible?","back":"Entrants can recover almost all their outlay when leaving.","mcqOptions":[{"text":"Entrants can recover almost all their outlay when leaving.","correct":true,"explanation":"Low sunk costs mean assets and other expenditure remain recoverable on exit. Entrants can therefore leave after a brief attempt without losing much of their initial outlay."},{"text":"Entrants can recover almost all their outlay when entering.","correct":false,"explanation":"Entry is when the outlay is incurred, not normally recovered. Low sunk costs make hit-and-run entry credible because entrants can recover almost all expenditure when leaving the market."},{"text":"Entrants can avoid almost all their outlay when producing.","correct":false,"explanation":"Production still requires expenditure, including variable inputs, so entrants cannot avoid almost all outlay. Credibility comes from recovering most initial expenditure when leaving because little is sunk."},{"text":"Entrants can transfer almost all their outlay when expanding.","correct":false,"explanation":"Expansion does not explain the reversibility needed for hit-and-run entry. Low sunk costs matter because entrants can recover nearly all their outlay when they leave the market."}]},{"id":"6edf756f-1b85-40b1-b41a-1c745e9e708d","cardType":"basic","points":3,"front":"How does a credible threat of entry affect incumbent prices and profit?","back":"

Prices remain near cost.
Profit remains near normal.

","mcqOptions":[{"text":"

Prices remain near cost.
Profit remains near normal.

","correct":true,"explanation":"Credible entry prevents incumbents from sustaining excessive mark-ups. Keeping price close to cost leaves firms earning approximately normal profit, reducing the incentive for hit-and-run entrants."},{"text":"

Prices remain near revenue.
Profit remains near maximum.

","correct":false,"explanation":"Firms always receive revenue from prices, so that comparison does not show competitive discipline. Credible entry pushes prices towards cost and restricts incumbent profit to around normal."},{"text":"

Prices remain near cost.
Profit remains near supernormal.

","correct":false,"explanation":"Sustained supernormal profit would attract entry and is inconsistent with prices staying close to cost. A credible threat keeps prices near cost and profit near its normal level."},{"text":"

Prices remain near monopoly.
Profit remains near normal.

","correct":false,"explanation":"Monopoly pricing normally includes a substantial mark-up and would encourage entry where barriers are low. A credible threat instead keeps prices near cost while profit remains near normal."}]},{"id":"5ce56bbe-345e-49af-bfd4-ff1216db568d","cardType":"basic","points":3,"front":"What efficiency can a highly contestable market achieve despite having few firms?","back":"It can achieve allocative and productive efficiency.","mcqOptions":[{"text":"It can achieve allocative and productive efficiency.","correct":true,"explanation":"Potential entry can force incumbents to price near marginal cost and minimise production costs. These pressures support allocative and productive efficiency despite a small number of existing firms."},{"text":"It can achieve dynamic and X-inefficiency.","correct":false,"explanation":"X-inefficiency is a failure to minimise costs, not a form of efficiency. High contestability can instead promote allocative and productive efficiency through pressure on prices and production costs."},{"text":"It can achieve monopoly and pricing efficiency.","correct":false,"explanation":"Monopoly and pricing efficiency are not the relevant standard efficiency categories. Contestability can generate allocative efficiency through cost-related pricing and productive efficiency through cost minimisation."},{"text":"It can achieve revenue and profit efficiency.","correct":false,"explanation":"Revenue and profit efficiency are not the two standard outcomes identified here. Potential competition can produce allocative and productive efficiency even where only a few firms currently operate."}]},{"id":"311caada-8661-467f-8055-41df0b9788c8","cardType":"cloze","points":null,"front":"Patents and licences are barriers to [ ]; contractual and redundancy commitments are barriers to exit.","back":"Patents and licences are barriers to entry; contractual and redundancy commitments are barriers to exit.","mcqOptions":[{"text":"entry","correct":true,"explanation":"Patents grant exclusive production rights and licences restrict permission to operate, so both can prevent prospective competitors from entering a market. They are therefore barriers to entry."},{"text":"exit","correct":false,"explanation":"Exit barriers make leaving costly, as contractual or redundancy commitments can do. Patents and licences instead restrict a prospective firm’s ability or legal permission to enter the market."},{"text":"production","correct":false,"explanation":"Patents and licences may regulate what can be produced, but in contestability analysis their key effect is preventing new firms from entering. Commitments such as redundancy costs obstruct exit."},{"text":"expansion","correct":false,"explanation":"Although licensing rules might sometimes affect expansion, the stated distinction concerns market access. Patents and licences are barriers to entry, while contractual and redundancy commitments hinder exit."}]},{"id":"159d1299-3fc2-4802-bf8c-1c560f6a0453","cardType":"cloze","points":null,"front":"Patents and licences are barriers to entry; contractual and redundancy commitments are barriers to [ ].","back":"Patents and licences are barriers to entry; contractual and redundancy commitments are barriers to exit.","mcqOptions":[{"text":"exit","correct":true,"explanation":"Contract termination charges and redundancy payments are costs incurred when operations close. They therefore make it harder or more expensive for a firm to exit the market."},{"text":"entry","correct":false,"explanation":"Patents and licences restrict market entry, but contractual and redundancy commitments generally create costs when a firm closes. They are therefore barriers to exit rather than entry."},{"text":"production","correct":false,"explanation":"These commitments may affect operating costs, but their contestability significance is the expense created when a business closes. Contractual and redundancy obligations are therefore barriers to exit."},{"text":"expansion","correct":false,"explanation":"Expansion barriers constrain growth, whereas redundancy and contractual commitments chiefly impose costs when activity is ended. They consequently make exit more difficult and reduce market contestability."}]},{"id":"861513af-a14d-4e28-ab69-b52761a96547","cardType":"basic","points":2,"front":"How can economies of scale create a barrier to entry?","back":"Large incumbents gain a cost advantage that small entrants cannot match.","mcqOptions":[{"text":"Large incumbents gain a cost advantage that small entrants cannot match.","correct":true,"explanation":"Economies of scale lower an incumbent’s average cost at high output. A small entrant cannot initially achieve that scale, leaving it unable to match the incumbent’s costs."},{"text":"Large incumbents gain a price disadvantage that small entrants cannot match.","correct":false,"explanation":"Economies of scale reduce unit costs rather than creating a price disadvantage. The barrier arises because large incumbents have a cost advantage unavailable to entrants operating at smaller output."},{"text":"Large incumbents gain a demand advantage that small entrants cannot match.","correct":false,"explanation":"Economies of scale concern falling average costs as output rises, not an automatic increase in demand. They create a cost advantage that makes small-scale entry difficult."},{"text":"Large incumbents gain a revenue guarantee that small entrants cannot match.","correct":false,"explanation":"Producing on a large scale does not guarantee revenue because consumer demand remains uncertain. The entry barrier is the incumbent’s lower unit cost, which small entrants cannot initially match."}]},{"id":"a05f8cef-02f8-480c-9cae-cebd6a47dabc","cardType":"basic","points":3,"front":"Name three non-legal barriers that can deter entrants.","back":"

Brand loyalty
Heavy advertising
Control of key resources

","mcqOptions":[{"text":"

Brand loyalty
Heavy advertising
Control of key resources

","correct":true,"explanation":"Established customer preferences, costly promotional competition and restricted access to essential inputs can all disadvantage prospective entrants without relying on laws or formal regulatory restrictions."},{"text":"

Patent protection
Operating licences
Control of legal permits

","correct":false,"explanation":"Patents, licences and permits are legal or regulatory barriers, so they do not answer a request for non-legal barriers. Valid examples include brand loyalty, heavy advertising and resource control."},{"text":"

Low sunk costs
Weak advertising
Access to key resources

","correct":false,"explanation":"Low sunk costs, weak incumbent advertising and accessible resources generally facilitate rather than deter entry. Brand loyalty, heavy advertising and incumbent control of key resources create genuine barriers."},{"text":"

Price competition
Consumer choice
Growth of market demand

","correct":false,"explanation":"Consumer choice and growing demand can create opportunities for entrants, while price competition alone is not the required set. Brand loyalty, heavy advertising and control of resources can deter entry."}]},{"id":"518e134e-ca6e-4ee9-8008-aac957edf866","cardType":"basic","points":2,"front":"How can incumbent pricing deter entry before a rival enters?","back":"Limit pricing or predatory pricing makes entry appear unprofitable.","mcqOptions":[{"text":"Limit pricing or predatory pricing makes entry appear unprofitable.","correct":true,"explanation":"An incumbent can set a strategically low price to signal that an entrant will not earn sufficient profit. This discourages entry before a rival becomes established."},{"text":"Premium pricing or price skimming makes entry appear unprofitable.","correct":false,"explanation":"High premium or skimming prices may reveal supernormal profit and attract competitors rather than deter them. Limit or predatory pricing uses low prices to make entry appear unprofitable."},{"text":"Transfer pricing or shadow pricing makes entry appear unprofitable.","correct":false,"explanation":"Transfer pricing concerns transactions within an organisation, while shadow pricing values resources without market prices. Limit or predatory pricing strategically lowers the market price to discourage entry."},{"text":"Average pricing or cost-plus pricing makes entry appear unprofitable.","correct":false,"explanation":"Average or cost-plus pricing applies routine cost-based mark-ups and does not necessarily deter rivals. Limit or predatory pricing deliberately presents entrants with an apparently unprofitable market."}]},{"id":"ffe81d1f-e5ef-4293-9083-a89321dd4d52","cardType":"basic","points":2,"front":"Why do barriers to exit also deter entry?","back":"Firms hesitate to enter if they cannot later leave cheaply.","mcqOptions":[{"text":"Firms hesitate to enter if they cannot later leave cheaply.","correct":true,"explanation":"Costly exit raises the financial risk of entering because capital may become trapped if the venture fails. Potential entrants are therefore more reluctant to challenge incumbent firms."},{"text":"Firms hesitate to enter if incumbents can later leave cheaply.","correct":false,"explanation":"The incumbent’s ability to leave cheaply does not trap the entrant’s resources. Entry is deterred when the entrant itself cannot leave cheaply if market conditions prove unfavourable."},{"text":"Firms hesitate to enter if they cannot initially charge low prices.","correct":false,"explanation":"An inability to charge low prices is not the mechanism linking exit barriers to entry. Firms hesitate because costly exit may trap their investment if entry is unsuccessful."},{"text":"Firms hesitate to enter if incumbents cannot earn normal profit.","correct":false,"explanation":"Incumbents’ ability to earn normal profit does not explain the deterrent effect. Potential entrants are discouraged because they may be unable to leave cheaply and recover resources."}]},{"id":"ed594ead-b99b-40e2-99c0-b90d2a61b72a","cardType":"basic","points":2,"front":"How do high sunk costs affect incumbent behaviour?","back":"Entry becomes less credible, allowing higher prices and supernormal profit.","mcqOptions":[{"text":"Entry becomes less credible, allowing higher prices and supernormal profit.","correct":true,"explanation":"High sunk costs make unsuccessful entry expensive because those costs cannot be recovered. The weaker threat of entry allows incumbents to raise prices and sustain supernormal profit."},{"text":"Entry becomes more credible, forcing lower prices and normal profit.","correct":false,"explanation":"This reverses the effect of sunk costs: irrecoverable expenditure makes potential entrants less willing to enter. The weaker threat permits incumbents to charge higher prices and earn supernormal profit."},{"text":"Incumbents face higher variable costs, forcing lower output and subnormal profit.","correct":false,"explanation":"Sunk costs are irrecoverable fixed expenditures, not variable costs that rise with output. Their main effect is to weaken potential entry, allowing higher prices and supernormal profit."},{"text":"Entry becomes less credible, forcing lower prices and normal profit.","correct":false,"explanation":"Although high sunk costs do make entry less credible, the pricing consequence is reversed here. Weaker competitive pressure allows incumbents to charge higher prices and retain supernormal profit."}]},{"id":"423d796c-9f45-465e-9b1c-bcf75ff9b443","cardType":"basic","points":3,"front":"Why are food delivery apps relatively contestable?","back":"

Entry needs mainly software and self-employed couriers.
Platforms can withdraw cheaply if profits fade.

","mcqOptions":[{"text":"

Entry needs mainly software and self-employed couriers.
Platforms can withdraw cheaply if profits fade.

","correct":true,"explanation":"The asset-light model limits both initial investment and unrecoverable exit costs. Firms can enter using software and flexible couriers, then withdraw relatively cheaply if demand or profits fall."},{"text":"

Entry needs mainly restaurants and employed couriers.
Platforms must retain costly premises if profits fade.

","correct":false,"explanation":"Delivery platforms generally connect existing restaurants with flexible couriers rather than owning restaurants or retaining extensive premises. Their relatively low sunk costs make entry and withdrawal comparatively easy."},{"text":"

Entry needs mainly depots and company-owned vehicles.
Platforms face large sunk losses if profits fade.

","correct":false,"explanation":"This wrongly treats delivery apps as asset-heavy logistics businesses. Entry relies mainly on software and self-employed couriers, while limited sunk investment allows platforms to withdraw cheaply."},{"text":"

Entry needs mainly exclusive licences and franchises.
Platforms must continue operating if profits fade.

","correct":false,"explanation":"Exclusive licences and obligations to remain are barriers associated with less contestable markets. Food delivery platforms can enter through software and flexible labour, then withdraw relatively cheaply."}]},{"id":"8fdb0ff8-c434-4910-a9c5-3a6d1c0eef29","cardType":"basic","points":2,"front":"Why does the CMA focus on removing entry barriers rather than counting firms?","back":"Removing barriers strengthens the threat of entry; firm numbers alone do not.","mcqOptions":[{"text":"Removing barriers strengthens the threat of entry; firm numbers alone do not.","correct":true,"explanation":"Contestability depends on whether potential competitors can enter and exit easily, not simply on how many firms currently operate. Credible entry threats can discipline even a concentrated market."},{"text":"Removing barriers increases the current market share; firm numbers reveal all competitive pressure.","correct":false,"explanation":"Removing barriers does not necessarily increase any firm’s current market share, and firm counts overlook potential competition. The CMA targets barriers because easier entry creates competitive pressure on incumbents."},{"text":"Removing barriers weakens the threat of entry; concentrated markets are always competitive.","correct":false,"explanation":"Lower barriers strengthen rather than weaken the threat of entry. Concentrated markets are competitive only when potential entrants can credibly challenge incumbents, so concentration alone is not decisive."},{"text":"Removing barriers guarantees perfect competition; incumbent behaviour alone does not.","correct":false,"explanation":"Lower entry barriers improve contestability but do not guarantee perfect competition, which requires additional strict conditions. The CMA focuses on the credible threat of entry rather than firm numbers alone."}]}]}],"examCountdown":{"examDate":"2027-05-10","paperLabel":"Paper 1"},"heading":"3.4.7 Contestability","title":"3.4.7 Contestability Flashcards","topbar":{"backHref":"/a-level/economics/edexcel/a/flashcards"},"topicSidebar":"$L38"}]}],"topicId":"a5263507-4afb-5bfa-a9a7-4db283774d15","walled":"$L39"}],"$L3a","$L3b"]