Economics · Year 13

Active learning ideas

Contestable Markets and Market Power

Contestable markets theory feels abstract to Year 13 students until they feel the pressure of potential competition firsthand. Active learning turns the invisible threat of hit-and-run entry into a tangible experience, making the link between theory and firm behavior clear through concrete roles and decisions.

• National Curriculum Attainment Targets
• A-Level: Economics - Market Structures
• A-Level: Economics - Contestable Markets

• 25–50 min
• Pairs → Whole Class
• 4 activities

Activity 01

• Socratic Seminar
• 35 min · Small Groups

Role-Play: Entry Threat Simulation

Divide class into incumbent firms and potential entrants. Incumbents set initial prices and outputs; entrants announce low-cost entry, prompting incumbents to adjust. Groups report decisions and rationale in plenary. Debrief links choices to theory.

Analyze how the threat of entry can influence pricing and output decisions of incumbent firms.

Facilitation Tip

During the Entry Threat Simulation, circulate and challenge groups by asking one member to play the role of the incumbent firm and another to argue why their entry is credible, forcing students to confront sunk costs and exit barriers directly.

What to look for

Present students with a scenario: 'A large tech company dominates the market for online video streaming, but the technology required to start a new service is becoming widely available and inexpensive. Discuss how the threat of new entrants might influence the dominant firm's pricing and content acquisition strategies, even if no new competitor has yet emerged.'

• Analyze
• Evaluate
• Create
• Social Awareness
• Relationship Skills

Activity 02

• Case Study Analysis
• 45 min · Small Groups

Case Study Analysis: Sector Analysis

Provide cases like UK energy markets. Groups identify sunk costs, entry barriers, and contestability level. They predict incumbent responses and CMA interventions. Share findings via gallery walk.

Differentiate between actual competition and potential competition in shaping market outcomes.

Facilitation Tip

In the Sector Analysis case study, assign each group one industry and require them to present a two-minute pitch on whether it is contestable, using only the cost and technology data provided to prevent generic answers.

What to look for

Ask students to identify two key assumptions of contestable market theory. Then, have them briefly explain one real-world industry where these assumptions might hold true and one where they are unlikely to apply, justifying their choices.

• Analyze
• Evaluate
• Create
• Decision-Making
• Self-Management

Activity 03

• Formal Debate
• 50 min · Whole Class

Formal Debate: Policy Application

Split class into teams: one argues contestability should guide CMA over structure-conduct; other defends traditional metrics. Present evidence from cases, vote, and reflect on strengths.

Assess the policy implications of contestable market theory for competition authorities.

Facilitation Tip

For the Debate on Policy Application, assign one student per team to act as the competition authority, ensuring policy relevance is always central to the arguments made.

What to look for

On an index card, students should write one sentence defining 'hit-and-run entry' and one sentence explaining why low sunk costs are crucial for contestable markets. They should also list one policy implication for competition authorities derived from this theory.

• Analyze
• Evaluate
• Create
• Self-Management
• Decision-Making

Activity 04

• Socratic Seminar
• 25 min · Pairs

Graphing: Response Curves

Individuals plot average cost, marginal cost, and demand curves. Shade entry threat zones, adjust for low sunk costs. Pairs compare and discuss pricing shifts.

Analyze how the threat of entry can influence pricing and output decisions of incumbent firms.

Facilitation Tip

When students graph response curves in the Graphing activity, have them label each curve with the firm’s strategy so the visual output matches their strategic decisions in the simulation.

What to look for

Present students with a scenario: 'A large tech company dominates the market for online video streaming, but the technology required to start a new service is becoming widely available and inexpensive. Discuss how the threat of new entrants might influence the dominant firm's pricing and content acquisition strategies, even if no new competitor has yet emerged.'

• Analyze
• Evaluate
• Create
• Social Awareness
• Relationship Skills

A few notes on teaching this unit

Experienced teachers approach contestable markets by anchoring theory in lived experience—using simulations to make the threat of entry visceral and case studies to test assumptions against messy reality. Avoid over-reliance on graphs alone; students need to see how pricing and investment decisions change under threat, not just how curves shift. Research suggests that students grasp contestability faster when they repeatedly confront the same scenario from multiple angles: first as an incumbent deciding whether to raise prices, then as a potential entrant weighing costs, and finally as a policy maker judging outcomes.

Students will demonstrate understanding by explaining why incumbents price at average cost despite few actual rivals, by identifying key contestability conditions in real sectors, and by designing strategies that deter entry without actual competition. Evidence of learning appears in their role-play choices, case study justifications, and graph annotations.

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Watch Out for These Misconceptions

• During Entry Threat Simulation, watch for students assuming that contestability requires many actual competitors.

  Use the role-play to show how a single credible entrant can discipline the incumbent. After each round, ask groups to compare strategies: did the incumbent lower prices even though only one potential entrant existed?

• During Sector Analysis, watch for students concluding that high sunk costs always eliminate contestability.

  Have groups classify costs in their assigned industry using the provided data. Ask them to calculate whether profits could cover entry costs in one year or two, forcing them to compare sunk costs with expected returns.

• During Entry Threat Simulation, watch for students assuming incumbents ignore potential entrants without immediate action.

  Ask the incumbent team to present their pricing strategy at the start and after the threat is revealed. Listen for students who justify limit pricing even when no rival has entered yet.

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Methods used in this brief

• Socratic Seminar
• Case Study Analysis
• Formal Debate