Airline Industry and Contestability Project What is a contestable marke

Airline Industry and Contestability Project What is a contestable market?In a contestable market, there ar one or a number of firms which wage maximise. In other words the number of firms is irrelevant. Thekey presumptuousness to make here is that barriers to entry to the industry be relatively low, as is the cost to pass on the industry. The existenceof potential entrants into the industry forget tend to pass on profits totheir normal level even in the short run, because existing firms willwant to deter new entrants from coming into the market. Contestablemarkets are both(prenominal) productively and allocatively efficient and arelikely to be efficient in the short run as well.The theory regarding the type of profit made in a contestable 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 allure new entrants into the market to take some of this profit awayfrom the existing firm. As more competition is attracted then the newprices will force 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 means that existingfirms will be wipe out competitively, even if the firm is a monopoly.The key assumption of a contestable market is that it gives the firmsthe ability to infix and exit the market. It is natural to assume 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 costs. These are the costs that a firm cantrecover when they decide to exit the industry. An mannikin of a sunkcost would be money spent on advertising, because you cannot recoverthe money you spent on advertising. If sunk costs are low or aroundnothing 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 excuse 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. 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 off orlanding, which reduces the amount 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 increase in Ryanair p rofits 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 intelligence information show that it is more becoming less and less contestablewith mergers and few firms producing at low cost and really dominatingthe industry.