Contestable markets are those in which competitive pressures from potential entrants exercise strong constraints on the behaviour of incumbent suppliers. For a market to be contestable, there must be no significant entry barriers. Then, in order to offer no profitable opportunities for additional entry, an equilibrium configuration of the industry must entail no significant excess profits, and must be efficient in its pricing and in its allocation of production among incumbent suppliers. This is so of a contestable market whether it is populated with only a monopolist or with a large number of actively competing firms, because it is potential competition from potential entrants rather than competition among active suppliers that effectively constrains the equilibrium behaviour of the incumbents.
KeywordsAntitrust enforcement Barriers to entry Contestable markets Increasing returns Integer problem Long-run competitive equilibrium Marginal and average cost pricing Natural monopoly Oligopoly Partial equilibrium Perfect competition Perfectly contestable markets Ramsey optimum Scale economies Weak invisible hand theorem of natural monopoly
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