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Open the file below and respond to the questions in your notebooks or on your computer.

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Complete this worksheet before attempting the self assessment below.

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Read this article to get a deeper understanding of how UK banking is becoming more contestable.

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A-Level, GCSE & vocational qualification support resources

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A-Level, GCSE & Vocational qualification support resources, serving over 2 million students & teacher users every month.

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Watch this video if you need further support on contestability.

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This topic video is an introduction to contestable markets looking at the factors that affect contestability and also some topical examples of industries where contestability is becoming more important.

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To understand what is meant by contestability and its implications for firms’ behaviour.

To explain the relationship between sunk costs and the degree of contestability.

To understand how sunk costs can act as a barrier to entry or exit.

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Take this quiz to see how well you understand contestable markets. If you get less than 80%, review your answers with me.

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Copy this essay into Word or Pages.

Then, highlight the knowledge, application, analysis and evaluation in this essay on contestable markets.

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A contestable market has freedom of entry and exit, low sunk costs and a competitive equilibrium.

There are high fixed costs in setting up an airline firm. Buying planes, training staff e.t.c. Therefore there are significant economies of scale in this industry. Therefore it makes it difficult for a new firm to enter. This is because a small firm would have higher average costs than established firms and be unable to compete.

However new firms have entered the market in recent years. E.g. Ryanair, Easy Jet. It may be possible to buy or rent planes cheaply therefore there is some contestability.

There is strong brand loyalty for many airlines e.g. British Airways. They spend a lot of money on advertising. Therefore new firms would have to spend a lot of money on advertising as well. This is a sunk cost because it is non-recoverable and therefore would deter entry because firms could lose money. This makes the market less contestable.

However, for many customers, brand loyalty is not important as they are more concerned with getting cheap prices. Therefore new firms who offer no frills, low prices have been able to enter the market capturing market share from the large, existing firms. This means there is a significant element of contestability.

Another barrier to entry is vertical integration. For example, it is difficult for new firms to getting landing slots at major airports. E.g. Heathrow this is a big factor to reduce contestability. However new firms can get landing slots at smaller airports e.g. Luton, Stanstead.

The big airlines used to make high levels of profit suggesting there are barriers to entry and no scope for hit and run competition. However, in recent years profitability has fallen due to the entry of new firms. Therefore the UK airline industry has become reasonably contestable in recent years.

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Is UK Airline Industry Contestable? - Economics Help

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Essay Question: Discuss whether the airline industry is contestable? A contestable market has freedom of entry and exit, low sunk costs and a competitive equilibrium. There are high fixed costs in setting up an airline firm. Buying planes, training staff e.t.c. Therefore there are significant economies of scale in this...

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Read the following notes and highlight the key features of contestability.