Contestable Market Theory

DEFINITION of 'Contestable Market Theory'

An economic concept that refers to a market in which there are only a few companies that, because of the threat of new entrants, behave in a competitive manner.

BREAKING DOWN 'Contestable Market Theory'

The contestable market theory assumes that even in a monopoly or oligopoly, the existing companies will behave competitively when there is a lack of barriers, such as government regulation and high entry costs, to prevent new companies from entering the market.

Considerable criticism surrounds this theory because there are often large entry and exit costs associated with entering a market.

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