A contestable market is defined as a market where there is freedom of entry and exit. This market must have low sunk costs. Sunk costs are those costs you can’t recover when leaving the market.
In practise few markets are perfectly contestable, however there are degrees of contestability. With lower barriers to entry and exit, the market will be more contestable. Contestable markets are likely to have competitive prices and low profitability.
Example – Walking Tours Around Oxford
New entrant into market – 2 hour ‘free’ tour
The signs give an indication of how competitive the market is. ‘Don’t be fooled by ‘free tours‘. Has an incumbent firm being annoyed by a new firm entering the market?
It is quite easy to enter this market:
– Buy yourself a nice sign and wait on Broad street for tourists to pay you As long as you can speak for an hour on the origins of Oxford University you can enter the market. If you find the market is no longer profitable, you can leave with no set up costs.
Therefore in theory, there is scope for hit and run competition.
The council could create barriers to entry by introducing the necessity to get a permit to offer walking tours. For example, in Venice the number of licensed gondolas is strictly limited meaning they can charge high prices without threat of competition.
I’m not sure how strict the council are, but it seems a new firm or even individual could set up and offer walking tours.
Perhaps in the summer holidays I will give it a go. It’s probably a better hourly pay than marking exam papers….