1. Contestable Markets

2.  A market where there is freedom of entry to the industry and where costs of exit are low.

3.  Generally, perfectly competitive markets are very contestable, but monopolies exist on the other end of the extreme – not contestable at all.

4. What makes a market contestable or not?  1. Barriers to entry

6.  Legal barriers

7.  This applies particularly in the pharmaceutical industry.  ……………… for some drugs can last 3, 5 or 7 years.  Legal barriers also prevent new firms in mining and drilling for resources.

8.  Just a few years after the launch of Viagra, a substitute - Levitra, is now being manufactured by the German firm, Bayer AG, and marketed by British firm GlaxoSmithKline. Pfizer's patent for Viagra expired in June 2013, allowing other pharmaceutical companies to produce their own version and sending prices plummeting from £21.27 for a pack of four to £1.45

9.  High Capital Costs

10. Fancy way of putting it….  asymmetry in costs that often exists between the incumbent firm and the potential entrant

11.  Sunk costs – the most obvious sunk cost is advertising.  Sportswear, beer and soft drinks companies spend billions on advertising, celebrity endorsement and even stadium building.

14. Barrier to entry  Limit pricing

15. Not really a barrier to entry, but nonetheless a factor  Brand loyalty.  This can be created by advertising (not so innocent) of through decades of excellent trading.  Royal Mail, for example, have brand loyalty.  When a brand name becomes a noun it suggests strong brand loyalty – Kleenex, Hoover, Cellotape & WD40.

16. Brand proliferation  This means saturating the market with a host of similar products meaning there are fewer niches for smaller firms to exploit.

17. Barrier to entry in airline business  1. do you have slots?

18.  It is up to you to determine whether these barriers to entry are ‘innocent’ or ‘deliberate’.

20.  1. maybe a ‘niche’ or specialist market exists. A new supplier may be able to charge a premium price.

24.  Premium pricing is more likely when…..

25.  Product differentiation is possible  The good is a small proportion of people’s income.

26. What helps make a market contestable?  2. maybe the chance to market a ‘fair trade’ or ‘organic’ alternative exist. This makes the market more contestable.

27.  We started innocent in 1999 after selling our smoothies at a music festival. We put up a big sign asking people if they thought we should give up our jobs to make smoothies, and put a bin saying 'Yes' and a bin saying 'No" in front of the stall. Then we got people to vote with their empties. At the end of the weekend, the 'Yes' bin was full, so we resigned from our jobs the next day and got cracking.  Since then we've started making veg pots, juices and kids' drinks, in our quest to make natural, delicious, healthy foods that help people live well and die old.  From the innocent smoothie homepage

28. Competition Authority  If the competition policy of the country allows foreign competition, the market is going to be more contestable.

29.  If a new entrant can be cross subsidised from existing profitable operations, that increased the contestability of the market.  Using cross subsidising, Virgin has successfully broken into traditionally difficult markets such as cola and airlines.

30.  The ability to lease capital equipment increases/decreases market contestability.

31. Ryanair began with one leased aircraft.  The airline began with a 15-seat leased aircraft, flying between Waterford and Gatwick Airport with the aim of breaking the ……………….. on London-Ireland flights at that time, held by British Airways and Aer Lingus.  They carried 81 million passengers in 2013 – more than Air France/KLM (78m) and IAG (67m).

32. Easyjet  It was launched by Greek Cypriot businessman Sir Stelios Haji-Ioannou with two leased Boeing 737-200 aircraft.  First two routes:  London Luton to Glasgow  London Luton to Edinburgh.

33.  Using a well known brand name from elsewhere can allow you to enter a different market.

34.  For example, the name Microsoft has helped the Xbox rival Sony Playstation.

35. From macroeconomics  Generally, loose ___________ ____________ and banks eager to _________ increases contestability.

36.  Contestability and the firm’s behaviour.