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. 

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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