contestable market

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contestable market

a MARKET where new entrants face costs similar to those of established firms and where, on leaving, firms are able to recoup their capital costs, less depreciation. Consequently, it is not possible for established firms to earn ABOVE NORMAL PROFIT as this will be eroded by the entry of new firms, or, alternatively, the mere threat of such new entry may be sufficient to ensure that established firms set prices that yield them only a NORMAL PROFIT return. Perfectly competitive markets (see PERFECT COMPETITION) are all contestable, but even some oligopolistic markets (see OLIGOPOLY) may be contestable if entry and exit are easily affected.

In recent times many markets have been opened up by a number of developments, including increasing international competition as trade barriers have been reduced, the introduction of FLEXIBLE MANUFACTURING SYSTEMS and ECOMMERCE trading on the INTERNET. See WORKABLE COMPETITION, CONDITION OF ENTRY, BARRIERS TO ENTRY, BARRIERS TO EXIT.

References in periodicals archive ?
The contestable markets theory takes a radically different view: a threat of entry will suffice to put pressure on producers to act competitively.
One of the commentators suggested that contestable markets theory leads to libertarian conclusions on the role of government (Shepard, 1984, p.
We admit the difference between free market theory of competition and contestable markets, but we plan to argue the opposite--that carefully examined, contestable markets theory supports free market conclusions about the absence of rationale for antitrust policies.
Notice the benefits of contestable markets theory over the perfect competition model.
Using the electricity industry as their template, the authors argue that today's regulated industries are not characterized by ease of new entry and exit, conditions on which the contestable markets theory depends.
1996, Contestable Markets Theory, Competition, and the United States Banking Industry (New York: Garland Publishing).
14) Contestable markets theory holds that in the presence of potential competition, incumbent firms will not be able to charge anything other than sustainable prices; any attempt to charge unsustainable prices would quickly prompt entry of and loss of market share to a competing seller.
The situation of a Reserve Bank, however, may come closer to that imagined by the contestable markets theory.
Contestable markets theory does not apply to electricity markets
In this respect, the Court's view reflects elements of contestable markets theory.
Under contestable markets theory, (51) "even a monopolist must operate in an efficient manner and must earn no more than a normal rate of return on its capital investments," because of the competitive pressure exerted by potential entrants.
Similar to the Trinko Court's view that monopoly power can be a good thing, contestable markets theory supposes that "concentration, price discrimination, conglomerate mergers, or vertical or horizontal integration .