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 ?
Aggregators refer to any person or entity engaged in consolidating electric power demand of end-users in the contestable market for the purpose of purchasing and reselling electricity on a group basis.
A contestable market is one in which entry is completely free and exit is absolutely costless.
However, this development does not necessarily reflect a contestable market.
content markets (indeed one and two-sided markets) may in fact be contestable markets, questioning the use of ex ante regulation in the first place;
These kinds of markets are called contestable markets.
CONTESTABLE MARKETS, COMPETITION AND PRIVATE PROPERTY
The theory and interpretation of the Panzar-Rosse H statistic Equilibrium Test E = 0 Equilibrium E < 0 Disequilibrium Competitive Conditions Test H [less than or equal to] 0 Monopoly or conjectural variations short run oligopoly H = 1 Perfect competition or natural monopoly in a perfectly contestable market or sales maximizing firm subject to a break even constraint 0< H <1 Monopolistic competition Table 2.
Baumol and Willing (1986) review the use of the theory of contestable market in relation to regulation.
Contestable market theory--which describes how a new, aggressive
1982), Brock (1983), Shepard (1984) Schwartz & Reynolds (1983) and Weitzman (1983) characterized a perfectly contestable market to be one where: (i) entrants and incumbents have identical production functions and have the access to the same factor markets; (ii) entrants do not have capacity constraints; (iii) potential entrants can review existing market prices before committing to entry, while incumbents are assumed to be incapable of immediate price retaliation (Bertrand-Nash pricing behavior) post-entry; and finally (iv) there are no sunk entry or exit costs.
The concept of the contestable market was presented by Baumol, Panzar, Willing (1982) and Caves (1982).
Contestable market policy has potentially important implications for the interpretation of market performance and for the design of economic policy (in particular "competition" or "antitrust policy").