Theory of Contestable Markets

The Theory of Contestable Markets suggests that the threat of potential competition can influence the behavior of companies, even in markets that appear monopolistic. If companies know new competitors could enter the market easily, they may keep prices reasonable and improve quality to avoid being challenged. This theory emphasizes that it’s not just the number of current competitors that matters, but also the possibility that new entrants can disrupt the market, leading to more consumer-friendly outcomes without the need for many actual competitors.