Contestable Market Theory

Contestable market theory suggests that markets with low entry and exit barriers lead to high competition among firms. Key characteristics include freedom of entry and exit, absence of irrecoverable costs, and equal access to technology. New entrants often use hit and run tactics to gain temporary advantages, keeping existing firms vigilant. The theory emphasizes that potential market value attracts new competitors, maintaining a dynamic competitive environment.

What are the primary characteristics of a contestable market?

Explain the significance of freedom of entry and exit in a contestable market.

How do barriers to entry and exit affect competition in a market?

What role does technology access play for new entrants in a contestable market?

Discuss the impact of hit and run tactics on existing competitors in a contestable market.