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.
contestable markets theory tells us that that band of freedom, though
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.
Dickens, R., 1996, Contestable Markets Theory, Competition, and the United States Banking Industry (New York: Garland Publishing).
While this article has presented sustainable pricing as a tool for evaluating pricing from a public policy point of view, the concept originated as a predictive notion in the theory of "contestable markets."(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. Clearly, the process necessary to adjust pricing policy is time-consuming.
(8) The first half of this article focuses on the inapplicability of the "contestable markets theory," which animates (at least implicitly) the Trinko opinion, to important segments of the electricity industry, such as transmission and generation.
Contestable markets theory does not apply to electricity markets
In this respect, the Court's view reflects elements of contestable markets theory.