| What is a contestable market? | The contestable market theory is an economic concept stating that companies with few rivals behave in a competitive manner when the market they operate in has weak barriers to entry. The theory assumes that even in a monopoly or oligopoly, incumbents will act competitively when there is a lack of barriers, such as government regulation and high entry costs, doing everything they can to prevent new entrants from one day putting them out of business. |
| What are some criticisms of contestable markets? | Criticism of contestable markets:
1. No markets 100% contestable (But the market may very well seem “almost contestable”
2. Unrealistic to assume no sunk costs (At least for many industries)
3. No strategic response from incumbent (focus on short run)
- Incumbent would price discriminate against entrant to deter hit-and-run
4. Cost is usually not the same for incumbents and entrants (have seen many arguments why it might be higher for entrants) |
| What is the hit and run entry theory? | Assumptions:
› Potential entrant can identify customers that will purchase product at lower price
› Entrant has time to sell to these customers before incumbent has time to react
› Entrant covers fixed and variable costs at quoted price
Examples for (potential) contestable markets:
› Low cost airlines, e.g. Tirstrup-London or Cologne – Pisa Ryan Air's original concept
› Service business without high fix costs
› Consulting business in general? |
