Airline Industry and Contestability Project What is a contestable marke

skyway Industry and Contestability Project What is a contestable commercialize?In a contestable market, at that place argon one or a go of firms which pelf maximise. In other words the number of firms is irrelevant. Thekey impudence to make here is that barriers to entry to the attentionare relatively low, as is the cost to impart the patience. The existenceof potential entrants into the industry leave alone incline to keep profits totheir normal level even in the pithy run, because existing firms leave alonewant to deter new entrants from coming into the market. debatablemarkets are both productively and allocatively efficient and arelikely to be efficient in the perfectly run as well.The theory regarding the symbol of profit made in a contestable marketis this. aberrant profit terminate only be made in the short run, onlynormal profit will be made in the long run. The former being is thatwhen firm try to profit maximises in the short run then this willattract new entrants into the market to take some of this profit awayfrom the existing firm. As to a greater extent competition is attracted then the newprices will force the prices and the profit down. This is the intellectwhy it is only possible to make normal profit in the long run. Thethreat of potential entrants into the industry nub 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 exit the market. It is natural to simulate thata monopoly is going to have high barriers to entry, but theorysuggests that there is a large dependence on the cost to exit theindustry rather than enter it. The cost of exiting and Industry isoften termed as drop cost. These are the costs that a firm cantrecover when they decide to exit the industry. An example of a sunkcost would be money worn-out(a) on advertising, because you cannot recoverthe money you spent on advertising. If sunk cost s are low or virtuallynothing then it is slouch to assume that a firm is operating in acontestable market. The lower the sunk cost the greater thecontestability of the market.The ease 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 shareof the excess profit and exit the... ...ity of service. In a less contestablemarket firms are under less pressure to produce a service of thehighest quality. late mergers involving Easyjet and Ryanair havemeant that the industry is being dominated by two queen-sized firms. This isan example of a Contestable market, because there is less competitionand these big firms will benefit from economies of scale such asbrand allegiance and these firms will have more slots for taking off orlanding, which reduces the tot up of competitors that can enter.The reason why it may be contestable is that in the industry there arelots of profits to be made. An subjoin 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 airline industry is seenas contestable, because of the east to set up, excess profits, butrecent news pose that it is more becoming less and less contestablewith mergers and few firms producing at low cost and really dominatingthe industry.