Airline Industry and Contestability Project What is a contestable marke

Airline Indus cause and Contestability Project What is a disputable merchandise?In a debatable market, there be one or a add together of firms which cabbage maximise. In other words the number of firms is irrelevant. The place assumption to make here is that barriers to entry to the laborare relatively low, as is the speak to to go bad the industry. The existenceof potential entrants into the industry will tend to keep bread totheir familiar level in time in the short gallop, because lively firms willwant to deter forward-looking entrants from coming into the market. Contestablemarkets are both productively and allocatively efficient and arelikely to be efficient in the short run as well.The theory regarding the type of profit make in a disputable marketis this. Abnormal profit can only be made in the short run, onlynormal profit will be made in the long run. The reason being is thatwhen firm try to profit maximises in the short run then this will invoke new entrants into the market to take some of this profit awayfrom the existing firm. As more competition is attracted then the newprices will oblige the prices and the profit down. This is the reasonwhy it is only possible to make normal profit in the long run. Thethreat of potential entrants into the industry nitty-gritty that existingfirms will behave competitively, even if the firm is a monopoly.The key assumption of a contestable market is that it gives the firmsthe ability to enter and egress the market. It is natural to assume thata monopoly is going to have high barriers to entry, just now theorysuggests that there is a large dependence on the cost to exit theindustry rather than enter it. The cost of exiting and Industry is a good deal termed as drop costs. These are the costs that a firm cant go back when they decide to exit the industry. An example of a sunkcost would be money spent on advertising, because you cannot recoverthe money you spent on advertising. If sunk costs are low or virtuallypostal code then it is correct to assume that a firm is operating in acontestable market. The lower the sunk cost the greater thecontestability of the market.The slackening at which a firm can enter and exit a market will leave itvulnerable to Hit and Run competition. If there is abnormal profitin an industry then newcomers will enter the market, take their contendof the excess profit and exit the... ...ity of service. In a less(prenominal) contestablemarket firms are under less pressure to produce a service of thehighest quality. Recent mergers involving Easyjet and Ryanair havemeant that the industry is being dominated by two big firms. This isan example of a Contestable market, because there is less competitionand these larger firms will benefit from economies of scale such asbrand loyalty and these firms will have more slots for taking slay orlanding, which reduces the amount of competitors that can enter.The reason why it may be contestable is that in the indus try there arelots of profits to be made. An increase in Ryanair profits wouldattract hit and run competition. Another reason is that Ryanair wasable to purchase a Boeing 747 at a significant discount. This meansthat there will be low sunk costs as these planes could be sold off ifyou decide to exit the industry.To conclude it can be said that the low cost air duct industry is seenas contestable, because of the east to set up, excess profits, but fresh news show that it is more becoming less and less contestablewith mergers and few firms producing at low cost and really dominatingthe industry.