Contestable Markets Theory

Contestable Markets Theory suggests that a market's competitiveness depends not just on current competitors but also on potential entrants. Even if there are few firms operating in a market, if it's easy for new businesses to enter and exit without significant costs, existing firms will act competitively to deter entry. This means they will keep prices in check and innovate to maintain their market position. So, the threat of new competition, rather than the actual number of firms, helps ensure fair prices and better services for consumers.