Contestable & Non-Contestable Markets

Quick revise

Contestability markets are where there is one firm (or a small number of firms) and due to freedom of entry and exit, the firm (or firms) face competition from potential new entrants and so operates like a perfectly competitive market

In reality there are barriers to contestability to most markets

The majority of markets are contestable to some extent

The degree of contestability is dependent on barriers to entry

Conditions for Contestability

Contestability means that businesses in a market will make pricing and output decisions based on the threat of competition. Markets are becoming increasingly contestable due to globalisation.

The following conditions need to apply for pure market contestability:

  • Freedom of entry and advertisement
  • Absence of sunk costs – these are costs that a business has to pay to enter the industry that cant be recovered or recouped
  • Perfect information