Key Terms: Contestable Markets

Sunk cost: A cost that has been committed and cannot be recovered if a firm leaves a market

Brand loyalty: Consistent preference for one brand over others

First mover advantage: Gains from being early into an industry and achieving economies of scale

Allocative efficiency: Achieved in a contestable market if existing firms price at marginal cost

X-efficiency: When strong actual and potential competition increases incentives for firms to reduce unit costs

Patent: A legal barrier to contestability that allows a firm to protect intellectual property for some years

Perfectly contestable market: A industry in which entry and exit are costless

Creative destruction: The upheaval of the established order in the pursuit of innovation

Process innovation: Change in the way a product or service is conceived, manufactured or distributed

Product innovation: Small, subtle changes to the characteristics and performance of a good or a service

Hit and run entry: Where new firms join an industry to cream off some supernormal profits of incumbents and then exit

Challenger brand: A rival product seeking to disrupt sales of established products by being innovative or using a different business model

Platform business: A business model that creates value by facilitating exchanges between two or more consumers and producers

Switching costs: Expenses that buyers face if they decide to change suppliers

Asymmetric information advantage: When incumbent businesses know more about their industry than potential entrants

Market liberalisation: Opening up an industry to allow new competitor