Contestable Market

Contestable Market refers to a market where there are no barriers to the entry and exit of firms. This makes it hard for existing firms in the market to consistently earn high profits as new firms can freely enter the market and compete against them.

By ramping up production, new firms increase the total supply of goods available to consumers in the market, thus causing prices to fall. They also bid up the price of inputs, causing the cost of production to rise.

Contestable markets, however, are usually rare in the real world either due to government regulations preventing the entry of new firms or the presence of a natural monopoly in an industry.