Contestable Market Theory - Definition
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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.
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.