The Theory of Contestable Markets

The Theory of Contestable Markets suggests that even if a market has few firms (monopoly or oligopoly), it can still behave competitively if there are no significant barriers to entry or exit. This means new competitors can easily enter if existing firms raise prices or reduce quality, keeping dominant companies cautious. The threat of new entrants encourages firms to keep prices low and avoid exploiting market power, fostering competitive behavior similar to perfectly competitive markets. Essentially, the real contestability of a market depends on how easily new competitors can challenge existing firms.