Cambridge International as and a level Economics Ebook

x-ineffi
ciency
, which means that their 
cost levels are higher than they would be in competitive 
fi rms because they do not have the incentive for process 
innovation. Th
ey become less dynamic, doing things in 
a particular way simply through tradition. In addition, 
some of their investment may take the form of erecting 
barriers to maintain the level of abnormal profi t by 
excluding potential rivals. Th
is will add to costs in the short 
run. It may be true but there is the possibility that these 
ineffi
ciencies are outweighed by economies of scale that 
lower average costs.
It is clear that monopolies can operate in ways that lead 
to ineffi
ciency or consumer exploitation. However, one can 
make a positive case for monopoly. Th
is explains why the 
investigation of monopoly practices is diffi
cult and each 
case must be judged on its own merits. It is dangerous to 
assume that monopoly is always harmful; the performance 
of a monopolist may be little diff erent from that of fi rms 
in oligopoly.
Contestable markets
So far, in dealing with market structures, the four models 
shown in 
Figure 7.13
 have been analysed. A 
contestable 
market
is not listed here. Th
is is because although 
contestability increasingly features in many markets 
throughout the world, it is not really a market structure as 
such. It is best seen as a set of conditions that can apply in 
any market structure.
Contestable market: 
any market structure where there 
is a threat that potential entrants are free and able to enter 
this market.
KEY TERM
By defi nition, a 
perfectly
contestable market is one in 
which there are no costs of entry and exit. So, only perfect 
competition matches this ideal; monopolistic competition, 
with few relatively costless barriers to entry and exit, 
can match it to some extent, as can oligopoly in certain 
situations.
A contestable market can be particularly seen as a 
means by which governments have sought to deregulate 
markets. Th
is requires the removal of barriers to entry so 
opening up the market to competition. It has had particular 
signifi cance in the UK; the principle of contestability 
has been central to the tremendous structural changes 
that have been made especially to the service sector of 
the economy with the introduction of new forms of 
competition into formerly protected markets.