Concepts such as sunk costs and hit-and-run competition
Sunk costs are costs a firm cannot recover if it leaves a market. Hit-and-run competition is when a new firm enters briefly to take profits, then exits.
Real World
When Lovefilm entered the UK DVD rental market in the early 2000s, it faced minimal sunk costs — its main asset was a software platform — making the market highly contestable. By contrast, a steel manufacturer spending £500m on a blast furnace cannot recover that cost if it exits, deterring entry.
Exam Focus
When asked to 'assess' contestability, always link sunk costs directly to the height of barriers to entry for marks.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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