What are contestable markets?

Contestable markets is a theory where Baumol (who created the theory) argued that if a market has no (or significantly low) barriers to entry and no sunk costs (they do not lose any money when they enter the industry when setting up the business), then the market would be subjected to 'hit and run' entrants who enter the market (through no barriers to entry and no sunk costs), take away supernormal profit and then leave the market again.

Therefore, if you think about it, if potential entrants can do that, the only way which will prevent it is to set Average Cost to Average Revenue, making no supernormal profit at all and just making normal profits which covers the total costs.

IF you're lazy and cant be bothered to read the above paragraphs then just remember, A CONTESTABLE MARKET has the following characteristics :

- No barriers to entry and exit
- No sunk costs
- ALL firms have access to the SAME technology. (Basically, so nobody is disadvantaged.)

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Hope this helps a little bit.

Contestable markets is a theory where Baumol (who created the theory) argued that if a market has no (or significantly low) barriers to entry and no sunk costs (they do not lose any money when they enter the industry when setting up the business), then the market would be subjected to 'hit and run' entrants who enter the market (through no barriers to entry and no sunk costs), take away supernormal profit and then leave the market again.

Therefore, if you think about it, if potential entrants can do that, the only way which will prevent it is to set Average Cost to Average Revenue, making no supernormal profit at all and just making normal profits which covers the total costs.

IF you're lazy and cant be bothered to read the above paragraphs then just remember, A CONTESTABLE MARKET has the following characteristics :

- No barriers to entry and exit
- No sunk costs
- ALL firms have access to the SAME technology. (Basically, so nobody is disadvantaged.)

=========================================================================================

Hope this helps a little bit.