Contestable market

contestablecontestabilitycontestable marketsnon-contestable market
In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, holds that there are markets served by a small number of firms that are nevertheless characterized by competitive equilibria (and therefore desirable welfare outcomes) because of the existence of potential short-term entrants.wikipedia
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Profit (economics)

profitprofitsprofitability
Contestable markets are characterized by "hit and run" competition; if a firm in a contestable market raises its prices so as to begin to earn excess profits, potential rivals will enter the market, hoping to exploit the high price for easy profit.
The same is likewise true of the long run equilibria of monopolistically competitive industries and, more generally, any market which is held to be contestable.

Coercive monopoly

coercive monopoliesTrade Coercioncoercive
It is a case of a non-contestable market.

Market power

pricing powerprice takerprice takers
The theory of contestable markets has been used to argue for weaker application of antitrust laws, as simply observing a monopoly market may not prove that a firm is exploiting its market power to control the price level.
Highly concentrated markets may be contestable if there are no barriers to entry or exit, limiting the incumbent firm's ability to raise its price above competitive levels.

William Baumol

William J. BaumolBaumolBaumol, William J.
In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, holds that there are markets served by a small number of firms that are nevertheless characterized by competitive equilibria (and therefore desirable welfare outcomes) because of the existence of potential short-term entrants.
Among his better-known contributions are the theory of contestable markets, the Baumol-Tobin model of transactions demand for money, Baumol's cost disease, which discusses the rising costs associated with service industries, Baumol's sales revenue maximization model and Pigou taxes.

Perfect competition

perfectly competitiveperfect marketimperfect market
The same is likewise true of the long run equilibria of monopolistically competitive industries and, more generally, any market which is held to be contestable.

Economics

economiceconomisteconomic theory
In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, holds that there are markets served by a small number of firms that are nevertheless characterized by competitive equilibria (and therefore desirable welfare outcomes) because of the existence of potential short-term entrants.

Market (economics)

marketmarketsmarket forces
In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, holds that there are markets served by a small number of firms that are nevertheless characterized by competitive equilibria (and therefore desirable welfare outcomes) because of the existence of potential short-term entrants.

Welfare economics

consumer welfarewelfareeconomic welfare
In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, holds that there are markets served by a small number of firms that are nevertheless characterized by competitive equilibria (and therefore desirable welfare outcomes) because of the existence of potential short-term entrants.

Barriers to entry

barrier to entryentry barrierbarriers
Its fundamental features are low barriers to entry and exit; in theory, a perfectly contestable market would have no barriers to entry or exit ("frictionless reversible entry" in economist William Brock's terms).

Barriers to exit

exitExit (economics)exit barrier
Its fundamental features are low barriers to entry and exit; in theory, a perfectly contestable market would have no barriers to entry or exit ("frictionless reversible entry" in economist William Brock's terms).

Theory of the firm

firmtheory of the functions of firmfirms
Contestable markets are characterized by "hit and run" competition; if a firm in a contestable market raises its prices so as to begin to earn excess profits, potential rivals will enter the market, hoping to exploit the high price for easy profit.

Sunk cost

sunk costssunk cost fallacysunk
The applicability of the theory to real-world situations may be questioned, however, particularly as there are very few markets which are completely free of sunk costs and entry and exit barriers.

Competition law

antitrustantitrust lawanti-trust
The theory of contestable markets has been used to argue for weaker application of antitrust laws, as simply observing a monopoly market may not prove that a firm is exploiting its market power to control the price level.

Oligopoly

oligopolisticoligopoliesoligopolists
However, it is now generally admitted that Baumol's judgment that the US airline industry was therefore best left deregulated was incorrect since the now duly deregulated industry is "well on its way" to evolving into a concentrated oligopoly.

Monopolistic competition

monopolistically competitivemonopolisticmonopolistic competitors

The New Palgrave Dictionary of Economics

The New Palgrave: A Dictionary of EconomicsNew Palgrave: A Dictionary of Economics[1987

Index of economics articles

an economics concern
*Capital (economics) – Capital asset – Capital intensity – Capitalism – Cartel – Cash crop – Catch-up effect – Celtic Tiger – Central bank – Ceteris paribus – Charity shop – Chicago School of Economics – Classical economics – Classical general equilibrium model – Coase conjecture – Coase theorem – Cobweb model – Collective action – Collusion – Commodity – Commodity market – Community-based economics – Comparative advantage – Comparative dynamics – Comparative statics – Compensating differential – Competition – Competition law – Complementary good – Comprehensive Income Policy Agreement – Computational economics – Concentration ratio – Consumer – Consumer price index – Consumer sovereignty – Consumer surplus – Consumer theory – Consumerism – Consumption (economics) – Contestable market – Contract curve – Contract theory – Cooperative – Cost – Cost–benefit analysis – Cost curve – Cost-of-production theory of value – Cost overrun – Cost-push inflation – Cost underestimation – Cournot competition – Cross elasticity of demand – Cultural ecology – Currency

Monopoly

monopoliesmonopolisticmonopolist
The theory of contestable markets argues that in some circumstances (private) monopolies are forced to behave as if there were competition because of the risk of losing their monopoly to new entrants.

Lars-Hendrik Röller

In 1987, Röller obtained a Ph.D. in economics from the University of Pennsylvania, where he also briefly worked as lecturer, with a thesis on the theory and application of contestable markets.

HM Prison and Probation Service

National Offender Management ServiceNOMSHer Majesty's Prison and Probation Service
And thirdly that there should be 'contestability' amongst these providers.

Shipping line

shipping companyshipping linesliner trading
In terms of commercial interests, the maritime industry has a high level of contestability for shipping lines.

History of microeconomics

In 1982 paper Baumol defined a contestable market as a market where "entry is absolutely free and exit absolutely costless", freedom of entry in Stigler sense: the incumbent has no cost discrimination against entrants.

Zero-profit condition

According to the theory of contestable markets, if few enough firms are in the industry so that one would expect positive economic profits, the prospect of other firms entering the market may cause firms in the industry to set prices as if those other firms were already in the market; thus actual entry by those firms is not necessary for the market to appear perfectly competitive.