Level 5 on the AQA rubric demands that analysis and evaluation are heavily grounded in the context of the real economy, moving beyond theoretical vacuums. Students often hit a ceiling at Level 4 because they recite the theory flawlessly but fail to anchor it to actual industries and current regulatory environments. In this example, we look at the economics of contestable markets.

Essay title:

"Evaluate the view that the threat of competition is more important than the actual number of firms in a market for determining economic efficiency.” (25)

1. Intercity Coach Travel (e.g., Megabus, FlixBus, National Express)

This is the textbook example of a highly contestable market with exceptionally low sunk costs.

• Application: Coaches can be easily leased rather than purchased outright. If a route becomes unprofitable, the physical assets (the buses) can simply be driven to a different route. This means exit costs are near zero.
• Level 5 Evaluation: Even if National Express is the sole operator (a monopoly) on a specific route between two UK cities, the threat of Megabus or FlixBus setting up a rival route overnight forces National Express to keep fares close to marginal cost. The threat of entry dictates their pricing strategy, proving the essay title's premise perfectly.

2. Veterinary Services (e.g., CVS Group, IVC Evidensia)

A powerful, contemporary counter-argument showing what happens when a market is not contestable.

• Application: Over the last decade, independent vet practices have been heavily consolidated by corporate groups. Crucially, the barriers to entry are incredibly high: expensive, highly specialized surgical equipment (sunk costs) and a severe national shortage of qualified veterinary labor.
• Level 5 Evaluation: Because hit-and-run entry is impossible, incumbents face virtually zero threat of new competition. Consequently, they do not need to limit price. This lack of threat has led to allocative inefficiency and excessive pricing—a core microeconomic failure that triggered the recent and ongoing CMA investigation into the sector.

3. Retail Banking (e.g., Monzo, Revolut, Starling vs. the 'Big Four')

A great opportunity to blend market structures with behavioral economics.

• Application: Historically an uncontestable oligopoly. However, regulatory interventions like 'Open Banking' and the granting of banking licenses to digital-only fintechs lowered technological barriers, creating a highly credible threat of entry.
• Level 5 Evaluation: The actual number of consumers switching their primary current accounts remains surprisingly low due to bounded rationality and behavioural inertia (default heuristics). Yet, the threat of losing future market share to challengers forced the Big Four to dramatically improve their dynamic efficiency (developing intuitive apps) and scrap certain overdraft fees. The threat forced the incumbents to act competitively.

4. Last-Mile Parcel Delivery (e.g., Evri, DPD, Amazon Logistics)

Shows how technological changes and the gig economy have destroyed traditional barriers to entry.

• Application: Previously dominated by the Royal Mail's infrastructural monopoly. Now, modern courier networks minimise sunk costs by utilising franchised models, self-employed gig-economy drivers who own their own vehicles, and localised drop-off points.
• Level 5 Evaluation: Because the sunk costs of setting up a localised delivery network are now so low, the market is highly contestable. The constant threat of localized, agile entry forces legacy operators like Royal Mail to constantly restructure to find productive efficiencies, proving that low barriers are more critical than historical market concentration.

5. Short-Haul Aviation (e.g., Ryanair, Wizz Air, easyJet)

A nuanced example of spatial contestability and the importance of secondary infrastructure.

• Application: Airplanes can be leased and re-routed. If British Airways or easyJet begins making excessive abnormal profits on a route out of Stansted or Luton, a rival like Wizz Air can rapidly lease aircraft and secure slots to execute a hit-and-run entry.
• Level 5 Evaluation: Students must evaluate that this only works where infrastructure allows. The threat of competition is highly effective at determining efficiency at regional airports (where slots are available). However, at capacity-constrained airports like Heathrow, the lack of available landing slots creates an artificial barrier to entry, neutralising the threat of competition and allowing incumbents to extract higher producer surplus.