186:
enter the market, which would lead to higher competition and thus lower prices. That would make the market more contestable. Sunk costs are those costs that cannot be recovered after a firm shuts down. For example, if a new firm enters the steel industry, the entrant needs to buy new machinery. If, for any reason, the new firm cannot cope with the competition of the incumbent firm, it will plan to move out of the market. However, if the new firm cannot use or transfer the new machines that it bought for the production of steel to other uses in another industry, the fixed costs on machinery become sunk costs so if there are sunk costs in the market, they impede the first assumption of no exit barriers. That market will not be contestable, and no firms would enter the steel industry.
249:. More generally, experimental evidence collected since the publication of Baumol's paper has suggested that perfectly competitive markets would, if they existed, behave in the way Baumol outlined, but the performance of imperfectly contestable markets (i.e. real-world markets) depends "on actual rather than potential competition" perhaps in part due to the range of "strategic responses" available to incumbents that were not considered by Baumol as part of his theory.
36:
218:, potential rivals will enter the market, hoping to exploit the high price for easy profit. When the original incumbent firm(s) respond by returning prices to levels consistent with normal profits, the new firms will exit. Because of that, even a single-firm market can show highly competitive behavior.
338:
Brock, 1983. p.1063, quoting Baumol, 1982: "This means that... an incumbent, even if he can threaten retaliation after entry, dare not offer profit-making opportunities to potential entrants because an entering firm can hit and run, gathering in the available profits and departing when the going gets
244:
and entry and exit barriers. Low-cost airlines remain a commonly referenced example of a contestable market; entrants have the possibility of leasing aircraft and should be able to respond to high profits by quickly entering and exiting. However, it is now generally admitted that Baumol's judgment
185:
Thus, for example, a monopoly protected by high barriers to entry (for example, it owns all the strategic resources) will make supernormal or abnormal profits with no fear of competition. However, in the same case, if it did not own the strategic resources for production, other firms could easily
194:
in the form of lower average cost of production. A new firm entering the market, with insufficient information or technology, could incur a higher average cost of production and so be unable to compete with the incumbent firm. That would lead to the incumbent firm enjoying monopoly power and
189:
It is very important for firms to have access to the same level of technology as that helps determine the average cost of the product. An incumbent firm having more knowledge and access to a technology for the production of a commodity could enjoy higher
357:
Brock, 1983. p. 1064. "Baumol et al.'s plea for removal of artificial barriers to entry and exit is to be applauded.... I am more skeptical about their conclusions that occasionally it is good public policy to restrict entry and
177:
A perfectly contestable market is not possible in real life. Instead, the degree of contestability of a market is talked about. The more contestable a market is, the closer it will be to a perfectly contestable market.
195:
supernormal profit in the market, as the new firm will exit the market. A solution to the problem could be governments providing equal access to knowledge and technology, as well as financial resources for the same.
433:
181:
Some economists argue that determining price and output is actually dependent not on the type of market structure (whether it is a monopoly or perfectly competitive market) but on the threat of competition.
245:
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
240:
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
237:
to control the price level. Baumol himself argued based on the theory for both deregulation in certain industries and for more regulation in others.
206:; in theory, a perfectly contestable market would have no barriers to entry or exit ("frictionless reversible entry" in economist
416:
100:
367:
Brock, 1983. p. 1057. "Some readers may feel that perfect contestability is an idealized notion of purely academic interest..."
72:
439:(arguing against the existence of anti-trust laws based on theory that government is solely responsible for coercive monopoly)
148:
served by a small number of firms that are nevertheless characterized by competitive equilibrium (and therefore desirable
79:
53:
456:
327:
119:
86:
310:
68:
57:
17:
471:
258:
221:
A concise theoretical statement of contestable markets with an illustrative graph is at
Economics Online.
476:
444:
268:
46:
93:
8:
273:
211:
191:
145:
452:
323:
263:
199:
149:
141:
233:, as simply observing a monopoly market may not prove that a firm is exploiting its
210:'s terms). Contestable markets are characterized by "hit and run" competition; if a
229:
The theory of contestable markets has been used to argue for weaker application of
207:
203:
230:
423:
392:
465:
215:
173:
Access to the same level of technology (to incumbent firms and new entrants)
234:
404:
Contestable
Markets and the Theory of Industry Structure: A Review Article
403:
241:
168:
246:
133:
35:
214:
in a contestable market raises its prices so as to begin to earn
152:) because of the existence of potential short-term entrants.
397:
Contestable
Markets and the Theory of Industry Structure
160:
A perfectly contestable market has three main features:
413:
John C. Panzar (1987). "Competition and efficiency,"
322:
Essentials of
Economics, John Sloman (third edition)
451:Essentials of Economics, John Sloman (3rd edition)
395:, John C. Panzar, & Robert D. Willig (1982).
60:. Unsourced material may be challenged and removed.
313:, Economics Online (at www.economicsonline.co.uk).
463:
140:, associated primarily with its 1982 proponent
428:The New Palgrave: A Dictionary of Economics
293:
291:
289:
375:
373:
120:Learn how and when to remove this message
286:
417:New Palgrave: A Dictionary of Economics
370:
14:
464:
305:
303:
58:adding citations to reliable sources
29:
410:, v. 91, no. 6, pp. 1055–1066.
24:
25:
488:
445:The Theory of Contestable Markets
300:
198:Its fundamental features are low
408:The Journal of Political Economy
34:
45:needs additional citations for
361:
351:
342:
332:
316:
224:
13:
1:
386:
348:For example, Greenspan, 1998.
7:
252:
10:
493:
402:William A. Brock (1983). "
164:No entry or exit barriers
155:
430:, v. 1, pp. 531–46.
420:, v. 1, pp. 543–44.
279:
269:Monopolistic competition
259:Bertrand–Edgeworth model
442:Stephen Martin (2000).
426:(1987). "Competition,"
311:"Contestable markets"
144:, held that there are
472:Monopoly (economics)
379:Martin, 2000. p. 43.
309:Critic Capital LLC,
297:Brock, 1983. p.1055.
69:"Contestable market"
54:improve this article
274:Perfect competition
138:contestable markets
27:Theory in economics
477:Market (economics)
192:economies of scale
437:by Alan Greenspan
424:George J. Stigler
393:William J. Baumol
264:Coercive monopoly
200:barriers to entry
142:William J. Baumol
130:
129:
122:
104:
16:(Redirected from
484:
380:
377:
368:
365:
359:
355:
349:
346:
340:
336:
330:
320:
314:
307:
298:
295:
150:welfare outcomes
136:, the theory of
125:
118:
114:
111:
105:
103:
62:
38:
30:
21:
492:
491:
487:
486:
485:
483:
482:
481:
462:
461:
389:
384:
383:
378:
371:
366:
362:
356:
352:
347:
343:
337:
333:
321:
317:
308:
301:
296:
287:
282:
255:
227:
158:
126:
115:
109:
106:
63:
61:
51:
39:
28:
23:
22:
15:
12:
11:
5:
490:
480:
479:
474:
460:
459:
449:
440:
431:
421:
411:
400:
388:
385:
382:
381:
369:
360:
350:
341:
331:
315:
299:
284:
283:
281:
278:
277:
276:
271:
266:
261:
254:
251:
231:antitrust laws
226:
223:
216:excess profits
175:
174:
171:
165:
157:
154:
128:
127:
42:
40:
33:
26:
18:Contestability
9:
6:
4:
3:
2:
489:
478:
475:
473:
470:
469:
467:
458:
457:0-273-68382-9
454:
450:
447:
446:
441:
438:
436:
432:
429:
425:
422:
419:
418:
412:
409:
405:
401:
398:
394:
391:
390:
376:
374:
364:
358:competition."
354:
345:
335:
329:
328:0-273-68382-9
325:
319:
312:
306:
304:
294:
292:
290:
285:
275:
272:
270:
267:
265:
262:
260:
257:
256:
250:
248:
243:
238:
236:
232:
222:
219:
217:
213:
209:
208:William Brock
205:
201:
196:
193:
187:
183:
179:
172:
170:
166:
163:
162:
161:
153:
151:
147:
143:
139:
135:
124:
121:
113:
102:
99:
95:
92:
88:
85:
81:
78:
74:
71: –
70:
66:
65:Find sources:
59:
55:
49:
48:
43:This article
41:
37:
32:
31:
19:
443:
434:
427:
414:
407:
396:
363:
353:
344:
334:
318:
239:
235:market power
228:
220:
197:
188:
184:
180:
176:
159:
137:
131:
116:
107:
97:
90:
83:
76:
64:
52:Please help
47:verification
44:
225:Application
466:Categories
387:References
242:sunk costs
169:sunk costs
110:April 2020
80:newspapers
435:Antitrust
247:oligopoly
134:economics
253:See also
339:rough."
146:markets
94:scholar
455:
326:
156:Theory
96:
89:
82:
75:
67:
280:Notes
101:JSTOR
87:books
453:ISBN
415:The
324:ISBN
212:firm
204:exit
202:and
73:news
406:".
167:No
132:In
56:by
468::
372:^
302:^
288:^
448:.
399:.
123:)
117:(
112:)
108:(
98:·
91:·
84:·
77:·
50:.
20:)
Text is available under the Creative Commons Attribution-ShareAlike License. Additional terms may apply.
