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Contestable Market Theory - Explained

What is Contestable Market Theory?

Written by Jason Gordon

Updated at April 25th, 2022

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Table of Contents

What is Contestable Market Theory?Characteristics of a Contestable Market

What is Contestable Market Theory?

 Contestable market theory is an economic concept that states that companies which have few rivals behave in a competitive manner because the market entry conditions are weak and allow for potential new entrants. 

The contestable market theory implies that there is a continuous threat of potential market entry by a company's rivals. 

Back to: STRATEGY & PLANNING

Characteristics of a Contestable Market

Characteristics of a contestable market include:

  • Freedom of entry or exit: There is no condition for firms trying to enter into the market.
  • Absence of irrecoverable incurred cost, i.e., sunken cost: Firms should be able to exit the market without incurring any capital cost.
  • Presence of equal access to the same level of technology by both existing firms and new entrants.
  • The new market entrants must be able to execute the hit and run tactics: Free and costless market entry enables new entrants to make profits and exit the market before existing firms bring down their prices.

Related Topics

  • Competitive Strategies
  • Functional Strategies
  • Organizational Strategies
  • Operational Strategy
  • Contestable Market Theory
  • Value Disciplines
  • Porter's Generic Strategies
  • Differentiation (Strategy)
  • Commoditize
  • Niche Market Strategy
  • Long Tail
  • Low-Cost Production
  • Resource-Based View of the Firm
  • Ansoff Matrix
  • Customer-Centric Strategy
  • Blue Ocean Strategy
  • Overfished Ocean Strategy
  • Hedgehog Concept (Strategy)
  • Innovation Strategy
  • Bleeding Edge
  • Disintermediation (Strategy)
  • Strategic Alliance
  • Coopetition (Strategy)
  • Loss Leader Strategy
  • Lean Strategy
  • Game Theory Perspectives

Other Related Topics

  • Perfect Competition
  • Market Power
  • Price Takers
  • Price Makers (Pricing Power)
  • X-Efficiency
  • Captive Market
  • Contestable Market Theory
  • Herfindahl-Hirschman Index
  • Concentration Ratio
contestable market theory contestable market

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