Economics Essay 38: Competition and Contestibility

Evaluate the extent to which competition and contestability are desirable in product markets.

Certainly! Let's elaborate on the distinction between competition and contestability in product markets using examples:

1. Competition: Competition drives firms to improve their offerings and strive for market dominance. Here are some examples of the benefits of competition:

   a) Efficiency: In the smartphone market, intense competition between companies like Apple, Samsung, and Google's Android partners has led to significant advancements in features, performance, and design. Each company strives to outperform others by enhancing their products' efficiency and functionality.

   b) Innovation: The competition between ride-sharing companies Uber and Lyft has spurred innovation in the transportation industry. These companies continuously introduce new features, such as shared rides, electric vehicles, and self-driving technology, to attract customers and gain a competitive edge.

   c) Consumer Benefits: The rivalry between airlines like Southwest, Delta, and United has resulted in more affordable airfares, improved services, and expanded route networks. Consumers can choose from a variety of options, enabling them to find flights that suit their preferences and budgets.

2. Contestability: Contestability focuses on the ease with which new firms can enter and compete in a market, regardless of the incumbents' power. Here are examples that illustrate the advantages of contestability:

   a) Dynamic Efficiency: The smartphone app market, dominated by Apple's App Store and Google's Play Store, remains highly contestable due to the ease with which developers can create and distribute apps. This contestability drives ongoing innovation, as developers strive to create popular and profitable applications, which benefits consumers.

   b) Discouraging Monopoly Power: The entrance of new players like Beyond Meat and Impossible Foods in the plant-based meat industry has disrupted the market previously dominated by traditional meat producers. The contestability of this market has prevented the establishment of monopolistic practices, fostering competition and offering consumers alternative choices.

   c) Lowering Barriers to Entry: The emergence of digital streaming platforms like Netflix, Amazon Prime Video, and Disney+ has increased contestability in the entertainment industry. These platforms, with their low distribution barriers and direct-to-consumer models, have challenged traditional cable and broadcast networks, leading to greater competition and more options for consumers.

By examining these examples, it becomes clear that competition and contestability are interrelated but distinct concepts. Competition among established firms drives efficiency, innovation, and consumer benefits, while contestability ensures ongoing market dynamics, prevents monopoly power, and lowers barriers to entry, encouraging new firms to enter and compete. Together, they create an environment that fosters continuous improvement, choice, and value for consumers.