What Is a Contestable Market?

A contestable market is a market that enters completely free and exits at no cost. The nature of competitive markets is that they are vulnerable to hit and run entrants. In economics, it means that competitive prices can be formed in the market, even if there is only one enterprise in the market, that is, a monopoly enterprise.

Contestable market

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Contestable market

Barriers to entry and exit are low; an absolutely contestable market has no entry and exit barriers at all. Competitive markets have the characteristics of a "hit and run" theory, that is, potential competitors enter the market for short-term profits. When existing companies in the market reduce their prices to fight back new competitors, competitors immediately exit market. So in this case, even if there is only one company in the market, the market is still very competitive.

Competitive market theory has been used to fight back

The low-cost aviation industry is often used as an example of a competitive market. New entrants can rent aircraft and have the ability to enter and exit faster with high profits in the market. In fact, the market still has some barriers to entry and exit, and may also encounter airport leases and vacancies, as well as predatory pricing policies adopted by existing companies.

in contrast

Compulsive monopoly