Contestable Market Theory

Contestable Market Theory suggests that even industries with few firms can be efficiently competitive if entry and exit are easy and low-cost. This means that potential new competitors serve as a discipline on existing firms, encouraging fair pricing and innovation. Essentially, the threat of new entrants keeps established companies from raising prices or becoming complacent, ensuring the market remains dynamic and consumer-friendly. The theory emphasizes market structure and barriers to entry or exit as key factors influencing competition, regardless of the current number of firms.