A
contestable market is one in which entry is completely free and exit is absolutely costless.
Thus, policy makers have simplified contestability, portraying the removal of barriers to entry as sufficient to create a
contestable market. Through applying contestability theory in this manner, policy makers rely upon the robustness of a small group of studies (Baumol, 1982; Baumol et al., 1983; Baumol and Willig, 1981) that do not clearly support the applicability of contestability theory to real world markets.
Thus, the monopolistic firm behaves exactly as in a
contestable market: Although it enjoys 100% of the market share, it does not have any market power.
"
Contestable Market Theory as a Regulatory Framework: An Austrian Postmorten," Quarterly Journal of Austrian Economics 7, no.
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.
CONSTRAINT II: CHARTERING COMPETITION AS A
CONTESTABLE MARKETUtteeyo Dasgupta examines the
contestable market hypothesis in markets with sunk entry costs in the paper entitled 'Potential Competition in the Presence of Sunk Entry Costs: An Experiment'.
The passenger airlift industry (further in the text PAI) is supposed to be contestable (quasi-competitive) in both the US and Western Europe, therefore it is often analyzed as a
contestable market. 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").
A
contestable market may contain only a single monopoly enterprise whose as-yet unidentified competitors are nevertheless in the wings awaiting their entry cue....
Through a
contestable market situation, fares would be kept at a reasonable level and passengers would be better served.