Contestable Market Theory

What is a 'Contestable Market Theory'

A contestable market theory is 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.

RELATED TERMS
  1. Biased Expectations Theory

    A theory that the future value of interest rates is equal to ...
  2. New Growth Theory

    An economic growth theory that posits humans' desires and unlimited ...
  3. Dow Theory

    A theory which says the market is in an upward trend if one of ...
  4. Random Walk Theory

    The theory that stock price changes have the same distribution ...
  5. Labor Theory Of Value

    An economic theory that stipulates that the value of a good or ...
  6. Dividend Signaling

    A theory that suggests company announcements of an increase in ...
Related Articles
  1. Trading

    7 Controversial Investing Theories

    We take a closer look at the theories that attempt to explain and influence the market.
  2. Investing

    Analyzing Apple's Threat of New Entrants (AAPL)

    Understanding the competitive forces within an industry can be as simple as looking at five factors. There is the rivalry within the industry itself, but there is also a collective power a company’s ...
  3. Trading

    Modern Portfolio Theory vs. Behavioral Finance

    Modern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ...
  4. Trading

    Dow Theory: Current Relevance

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.comThere is little doubt that Dow theory is of major importance in the history of technical analysis. Many of its tenets and ...
  5. Managing Wealth

    Using Porter's 5 Forces To Analyze Stocks

    These five qualitative measures allow investors to draw conclusions about a corporation that are not apparent on the balance sheet.
  6. Trading

    Dow Theory: Conclusion

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.comDow theory represents the beginning of technical analysis. Understanding this theory should lead you to a better understanding ...
  7. Investing

    Analyzing Netflix's Threat of New Entrants (NFLX)

    In 1979, a Harvard Business School professor named Michael E. Porter published a model of competitive forces. The model, called Porter’s Five Forces, is an important framework for qualitative ...
  8. Trading

    Dow Theory: Introduction

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.comAny attempt to trace the origins of technical analysis would inevitably lead to Dow theory. While more than 100 years old, ...
  9. Markets

    Macroeconomics: Conclusion

    By Stephen Simpson Given the enormous scale of government budgets and the impact of economic policy on consumers and businesses, macroeconomics clearly concerns itself with significant issues. ...
  10. Trading

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
RELATED FAQS
  1. What are the major differences between a monopoly and an oligopoly?

    The major differences between a monopoly and an oligopoly include the number of firms in the market, type of barriers to ... Read Answer >>
  2. What factors influence competition in microeconomics?

    Find out what influences competition in microeconomics and how perfect competition, monopoly and oligopoly vary in their ... Read Answer >>
  3. Is a good's production cost related to its value?

    Learn about the history and debate regarding the metrics used to determine the value of a good and which theories place emphasis ... Read Answer >>
  4. Why is Game Theory useful in business?

    Game theory was once hailed as a revolutionary interdisciplinary phenomenon bringing together psychology, mathematics, philosophy ... Read Answer >>
  5. What is the difference between perfect and imperfect competition?

    Learn the differences between perfect competition and imperfect competition and what types of markets are considered imperfectly ... Read Answer >>
  6. How does a monopoly contribute to market failure?

    Read a simple overview of the theory of market monopoly, where it originated and some contemporary challenges to the classical ... Read Answer >>
Hot Definitions
  1. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  2. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  3. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  4. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  5. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
  6. Security

    A financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship ...
Trading Center