Contestability of a Market

Topics: Perfect competition, Monopoly, Herfindahl index Pages: 3 (727 words) Published: March 13, 2013
1. a. Contestability of a market
Contestability of a market means the degree of contestability for a market. The more contestable a market is, the closer it to the perfectly contestable market. Contestable market means that in the market, the existing companies will behave competitively and a competitive price could be existed even in a monopoly or oligopoly. A perfectly contestable market has no barriers to entry and exit the market, potential entrants could entry market without sunk costs. “Hit and run” is a main feature of contestable market --the potential entrants entry market for short-term profit; when the existed companies lower the price to strike back the new entrants, the new entrants exit the market immediately. b. Concentration index of market

The concentration index shows the market share of total production in an industry by the few largest firms. Concentration index illustrates the quantity and scale of the company in an industry, and the extent of market control by the largest companies. The higher the concentration index it shows, the higher degree of oligopolistic and the lower competition an industrial is. c. Structure-conduct-performance paradigm (SCP paradigm)

SCP paradigm describes the relationship between competition and economic performance. According to SCP paradigm, structure determines firms’ conduct in a market, and the firms’ conduct determines industry's performance. 2. a. Greenfield investment

Greenfield investment means a company enters into a foreign country to start business by constructing new operational facilities. Since Greenfield investment expands the number of firms, it will increase the productivity and output of goods and services, and creates more job opportunities in host country. Also, Greenfield investment adds to the number of sellers in the host country market (if the production is for sale in the host country market). Greenfield FDI normally could reduce, or at least, remain unchanged the market...
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