contestable markets Watch
low sunk costs
low start up costs
Low sunk costs and low barriers to exit are the main ones, they mean that there is always a threat at businesses coming into the market and being able to leave without incurring significant costs. Theory suggests that this potential competition is enough to cause company's to reduce costs and operate more efficently
There are very few markets which are contestable as many require heavy advertising at the least (this represents a sunk cost). However in theory contestable markets result in monopoly firms having to reduce their prices in order to make the market seem less attractive to new entrants (and thus make a lower supernormal profit) if they didn't do this then theory shows that new firms could easily enter the market and take away the monopoly firms market share and supernormal profit. If the market is heavily contestable then the incumbent firm/firms may decide to set price equal to AR=ATC (sales maximisation) and hence make no supernormal profit but still retain (and perhaps enlarge) market share.
Obviously this is good for consumers as monopoly firms which exist in contestable markets cant exploit their monopoly power as much (therefore less regulation is needed) and so consumers get lower prices and better services. However it could be argued that for a market where there is no supernormal profit being earned there will be no investment into innovation and research and design (as argued by Schumpeter).
The result for the producers (the incumbent firms) is lower (or no) supernormal profit and the threat of new entrants. However this should result in them producing x-efficiently, otherwise new firms would enter the market and would produce x-efficiently hence being able to offer a lower price and forcing the inefficient firm out of business.
Hope this helps,