Contestable markets
In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, holds that there exist markets served by a small number of firms, which are nevertheless characterized by competitive equilibria (and therefore desirable welfare outcomes) because of the existence of potential short-term entrants.
A perfectly contestable market has three main features. It is a market that has -
A perfectly contestable market is not possible in real life.[citation needed] Instead, we talk about the degree of contestability of a market. The more contestable a market the closer it will be to a perfectly contestable market.
Economists argue[citation needed] that determining price and output is not actually dependent on the type of market structure, in other words whether it is a monopoly or perfectly competitive market, but rather the threat of competition. Hence, for example a monopoly protected by high barriers to entry (e.g. it owns all the strategic resources) will make supernormal or abnormal profits with no fear of competition. However, in this same case if it did not own the strategic resources for production then other firms could easily enter the market, leading to higher competition and thus lower prices, thus making the market more contestable.
Sunk costs are those costs that cannot be recovered after a firm shuts down. For example a new firm enters the steel industry. For this, the entrant needs to buy new machinery. Now, if for any reason this new firm could not cope up with the competition of the incumbent firm then it will plan to move out of the market. However, if the new firm cannot use or transfer the new machines that it bought for the production of steel to other uses in another industry, then these fixed costs on machinery become sunk costs. Hence if there are sunk costs present in the market it impedes the first assumption of no exit barriers. Hence this market will not be contestable and no firms would enter the steel industry.
It is very important for firms to have access to the same level of technology as that helps determine the average cost of the product. An incumbent firm having more knowledge and access to a technology for the production of a commodity could enjoy higher economies of scale in the form of lower average cost of production. A new firm entering the market, with insufficient information or technology, could incur a higher average cost of production, and therefore be unable to compete with the incumbent firm. This would lead to the incumbent firm enjoying monopoly power and supernormal profit in the market, as the new firm will exit the market. A solution to this problem could be governments providing equal access to knowledge and technology, as well as financial resources for the same.
Its fundamental features are low barriers to entry and exit; in theory, a perfectly contestable market would have no barriers to entry or exit ("frictionless reversible entry" in economist William Brock's terms). Contestable markets are characterized by "hit and run" competition; if a firm in a contestable market raises its prices much beyond the average price level of the market, and thus begins to earn excess profits, potential rivals will enter the market, hoping to exploit the price level for easy profit. When the original incumbent firm(s) respond by returning prices to levels consistent with normal profits, the new firms will exit. Because of this, even a single-firm market can show highly competitive behavior.
The applicability of the theory to real-world situations may be questioned, however, particularly as there are very few markets which are completely free of sunk costs and entry and exit barriers. Low-cost airlines remain a commonly referenced example of a contestable market; entrants have the possibility of leasing aircraft and should be able to respond to high profits by quickly entering and exiting. However, it is now generally admitted that Baumol's judgment that the US airline industry was therefore best left deregulated was incorrect, since the now duly deregulated industry is "well on its way" to evolving into a concentrated oligopoly. More generally, experimental evidence collected since the publication of Baumol's paper has suggested that perfectly competitive markets would - if they existed - behave in the way Baumol outlined, the performance of imperfectly contestable markets (i.e. real-world markets) depends "on actual rather than potential competition", perhaps in part due to the range of "strategic responses" available to incumbents that were not considered by Baumol as part of his theory.
The theory of contestable markets has been used to argue for weaker application of antitrust laws, as simply observing a monopoly market may not prove that a firm is exploiting its market power to control the price level. Baumol himself argued based on the theory for both deregulation in certain industries and for more regulation in others.

This is an excerpt from the article Contestable markets from the Wikipedia free encyclopedia. A list of authors is available at Wikipedia.
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Contestable market - Wikipedia, the free encyclopedia
In economics, the theory of Contestable markets, associated primarily with its 1982 proponent William J. Baumol, holds that there exist markets served by a small ...
en.wikipedia.org/wiki/Contestable_market
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Contestable Market Theory Definition | Investopedia
An economic concept that refers to a market in which there are only a few companies that, because of the threat of new entrants, behave in a competitive ...
www.investopedia.com/terms/c/contestablemarket.asp
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Contestable Markets - Department of Economics
Contestable markets: An Uprising in the Theory of Industry Structure. Author(s): William J. Baumol. Source: The American Economic Review, Vol. 72, No. 1, (Mar.
econ.ucdenver.edu/beckman/research/readings/baumol-contestable.pdf
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The Theory of Contestable Markets - Krannert School of Management
The literature on Contestable markets emerged from a research program that ... theory of Contestable markets has made toward its goals, and of empirical.
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Airline Mergers, Software Industry Monopolies: Contestable Markets ...
This free lesson by EconEdLink covers Banking, Economic Efficiency, Economic Freedom, Market Structure, Role of Competition.
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Contestable Markets - Economics Revision - Tutor2u
Contestable markets - Economics Revision.
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Contestable Markets - Tutor2u
Sep 23, 2012 ... Barriers to market contestability exist when there are sunk costs i.e. costs that have been committed by a business cannot be recovered once a ...
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Essay: Contestable Markets | Economics Help
A contestable market occurs when there is freedom of entry and exit into the ... When considering the contestability of markets it is important to consider the ...
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Contestable markets - Economics Online
An outline of the theory of Contestable markets. ... of contestability. On the basis of these two criteria, natural monopolies are the least Contestable markets. Video ...
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Contestable Markets - SlideShare
Apr 8, 2012 ... Contestable markets A2 Microeconomics. ... Contestable markets Re-Cap & intro to govt intervention 1660 views Like Liked; Entry Barriers in ...
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[PDF]The Theory of Contestable Markets - Krannert School of Management
The Theory of Contestable markets. Stephen Martin. Department of Economics. Purdue University smartin@purdue.edu. July 2000 ...
8 - Noncooperative equilibria in a contestable market - University ...
This chapter continues the analysis of a contestable market that was begun in Chapter 7 by developing a model that uses the theory of noncooperative games.
Quality in contestable markets : theoretical notes on a historical ...
Quality in Contestable markets : theoretical notes on a historical problem (1985). Author: Rashid, Salim; Khan, M. Ali; University of Illinois at Urbana-Champaign.
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IN Contestable markets by. Leonard J. Mirman. University of Illinois. Yair Tauman. Northwestern University. Israel Zang. Tel Aviv University. May 1983.
[PDF]Contestable Markets - Department of Economics
Contestable markets: An Uprising in the Theory of Industry Structure .... perfectly Contestable markets do not popu- ..... tation at New York University, Thijs ten.
Deregulation and the Theory of Contestable Markets - LexisNexis
Professor of Economics, Princeton and New York Universities. ... Next, we examine the efficiency attributes of Contestable markets, the conditions that contribute ...
Example of Contestable Market | Economics Help
Mar 30, 2011 ... A contestable market is defined as a market where there is freedom of ... an hour on the origins of Oxford University you can enter the market.
Contestable Market Definition | Economics Help
A contestable market is a market structure where there is freedom of entry and exit. ... Tejvan studied PPE at LMH, Oxford University and works as an economics  ...
CONTESTABLE MARKETS, TRADE, AND DEVELOPMENT
A perfectly contestable market is one in which entry and exit are perfectly costless ; in such a market, the mere ... Oxford Journals Oxford University Press.
[PDF]The Evolution of Contestable Markets: A Computing Simulation
The Evolution of Contestable markets: A. Computing Simulation. Zhenguo Han1, Hui Zhang2, Minrong He1. 1Southwest University of political Science and Law, ...
Books on the term Contestable markets
Contestable Markets and the Theory of Industry Structure
Contestable Markets and the Theory of Industry Structure
William J. Baumol, 1982
This classic text presents an integrative theory of what determines prices and industrial structure in Contestable markets. The exposition extends theory and technique and suggests some unique perspectives from which to view regulatory and deregulatory policy. All analysis is done both graphically and mathematically, and in certain chapters the aut...
The Theory of Contestable Markets: Applications to Regulatory and Antitrust Problems in the Rail Industry (Contributions...
The Theory of Contestable Markets: Applications to Regulatory and Antitrust Problems in the Rail Industry (Contributions...
1990
This book provides a comprehensive analysis of the application of the new theory of Contestable markets to the problem of the transition to deregulation in regulated industries. It offers an extensive review of both the theory and practice of Contestable markets, as well as guidelines for the practical application of the theory to regulated industr...
Economics
Economics
Anderton
Summary In a contestable market, there are one or a number of firms which profit maximise. The key assumption is that barriers to entry to the industry are relatively low, as is the cost of exit from the industry. 2. Firms in a contestable market will ...
The Economics Book
The Economics Book
2012
*Starred Review* To most readers, the term engaging economics book is an oxymoron. This cleverly presented new volume may change that. The Economics Book takes a unique approach to elucidating this often murky subject through well-written entries. Arranged by both subtopic and time frame, the history of economic theory, notable world events, and bi...
Advanced Economics Through Diagrams
Advanced Economics Through Diagrams
Andrew Gillespie, 2001
and. contestable. markets. Short run monopolistic competition Abnormal profits ( shaded area) Price discrimination Price discrimination involves charging different prices for the. Monopolistic competition involves many sellers with differentiated ...
Microeconomics (Quickstudy: Business)
Microeconomics (Quickstudy: Business)
2009
With the economy currently in turmoil, understanding how businesses and consumers interact is more important than ever—for business owners and students of economics, alike. A handy, fluff-free resource tool, our 3-panel (6-page) guide simplifies the world of microeconomics through the use of definitions, formulas and full-color tables and charts. C...
The theory of contestable markets: applications to ...
The theory of contestable markets: applications to ...
William B. Tye, 1990
This book provides a comprehensive analysis of the application of the new theory of Contestable markets to the problem of the transition to deregulation in regulated industries.
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Contestable markets
“Contestable Markets” And Google Maps | Cheap Talk
Contestable markets” And Google Maps July 22, 2013 in economics, teaching Via Matt Yglesias: [B]efore Apple launched its own iOS Maps app, Google Maps for iOS was already markedly inferior to Google Maps for Android. Not because Google was incapable of producing a great Google Maps app for iOS but because they didn’t want to make one.
cheaptalk.org/2013/07/22/contestable-markets-and-google-maps/
Unit 3 Micro: Indie Games and Contestable Markets
Here is a great example of the fast-changing dynamics of the computer gaming industry. Indie gaming studios are proving more nimble, innovative and ultimately smarter than the blockbuster console franchises who have dominated the industry for years. The rise of smartphone and tablet gaming has spawned a new type of.
www.tutor2u.net/blog/index.php/economics/comments/unit-3-micro-indie-games-and-contestable-markets
Contestable market | Policonomics
Contestable markets are those in which the short-term threats from potential competitors exert such a degree of pressure over the incumbents, that their behaviour is conditioned. Contestable markets are therefore in a competitive equilibrium even though the market can be considered to have a relatively small number of firms, meaning these could as well behave as in imperfect competition.
www.policonomics.com/contestable-market/
Revision Quiz: A2 Economics: Contestable Markets (1)
This 10-question revision quiz focuses on the concept of Contestable markets.Launch Revision Quiz: A2 Economics: Contestable markets (1).
www.tutor2u.net/blog/index.php/economics/comments/revision-quiz-a2-economics-contestable-markets-1
A Level Revision: Contestable Markets | econfix
In the A2 course Contestable markets is a popular essay question and is usually combined with another market structure. What is a contestable market? • One in which there is one firm (or a small number of firms) • Because of freedom of entry and exit, the firm faces competition and might operate in a…
econfix.wordpress.com/2013/05/16/a-level-revision-contestable-markets/
"Competition and Contestability in Central and Eastern European Banking" by Semih Yildirim
This study attempts to analyze the effects of financial liberalization and deregulation on competitive conditions in the banking industries of fourteen Central and Eastern European (CEE) transition economies using firm-level data for the period 1993-2000. The basis for the evaluation of competitive situation is the extant oligopoly theory in the new industrial organization literature, specifically, the competition model developed by Rosse and Panzar (1977), and Panzar and Rosse (1982,1987). This approach relies on the premise that, in their long-run equilibrium, banks will employ different pricing strategies in response to a change in input costs depending on the market structure in which they operate. The results of the competition analysis suggest that the banking markets of CEE countries cannot be characterized by the bipolar cases of either perfect competition or monopoly over 1993-2000 except for FYR of Macedonia and Slovakia. That is, banks earned their revenues as if operating under conditions of monopolistic competition in that period. Overall, large banks in transition countries operate in a relatively more competitive environment compared to small banks, or in other words, competition is lower in local markets compared to national and international markets. Finally, the cross-sectional analysis of competitive structure shows initially a decreasing trend between 1993 and 1996 and a subsequent increasing trend in competitive conditions after 1996. Having determined the degree of competition, this study further examines the relationship between competition, concentration and bank performance. The result of the empirical analysis does not yield any significant relationship between competition and concentration, suggesting the possibility that higher contestability, in part due to the recent technological advances, have resulted in an overall increase in competition, despite high level of market concentration. Furthermore, I find that the average bank deviates substantially from the best-practice frontier. The managerial inefficiencies in CEE banking markets were found to be significant, with average cost efficiency levels of 72 and 76 percent by the "Distribution-free Analysis" (DFA) and the "Stochastic Frontier Analysis" (SFA). These average estimates suggest that an average bank would have incurred 28 to 24 percent less of its actual costs had it matched its performance with the best-practiced bank. The alternative profit efficiency levels are found to be significantly lower relative to cost efficiency. According to SFA, approximately one-third of banks’ profits are lost to inefficiency, and almost one-half according to the DFA. In explaining the cross-sectional determinants of efficiency, the results suggest that higher efficiency levels
trace.tennessee.edu/utk_graddiss/2351/
The Age of Contestability, Bryan Caplan | EconLog | Library of Economics and Liberty
econlog.econlib.org/archives/2012/03/the_age_of_cont.html
Theory of Contestable Markets @ Intelligent Economist
www.intelligenteconomist.com/theory-of-contestable-markets/
Glynomics - Contestable Markets – Activity
glynomics.edublogs.org/2012/10/24/contestable-markets-activity/
ECONOMICS BY MUJTABA: Contestable Markets
Contestable Markets _______________________________________________ Contestability William Baumol (1980s) – theory that the number and size of not only competitors but potential competitors can affect a firm’s behaviour. Contestability is measured by the extent to which the gains from market entry for a firm exceed the cost of overcoming barriers to entry, with the risks of failure taken into account (affected by barriers to exit).
complete-econ.blogspot.com/2012/10/contestable-markets.html
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