Contestable market
Definition. A contestable market is one in which there are no significant barriers to entry or exit, so the threat of potential competition disciplines the behaviour of incumbent firms even if few firms currently operate. The key requirement is the absence of sunk costs that would deter hit and run entry.
Because incumbents fear new entrants, they tend to keep prices low and avoid excessive profits. Perfect contestability would drive firms towards normal profit regardless of the number of sellers.
This term belongs to Barriers to Entry in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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