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The theory of contestable markets has been used to argue for weaker application of Anti-trust laws as simply observing a highly concentrated or monopoly market does not mean that the firm is harming consumers by earning super-normal profits. The applicability of the theory to real world situations has been questioned, however, particularly as there are very few markets which are completely free of Sunk Costs and entry and exit barriers.

Low cost airlines are commonly referred to as an example of a contestable market. Entrants have the possibility of leasing aircraft and should be able to respond to high profits by quickly entering and exiting. In practice there may be barriers to entry and exit in the market associated with terminal leases and availability and Predatory Pricing by incumbents, signalled through built in Overcapacity .


CONTRAST



REFERENCES

  • Baumol, W. J. ; Panzar, J. C. & Willig R. D. (1982) ''Contestable Markets and the Theory of Industry Structure''

  • ''Antitrust'' by Alan Greenspan (arguing against the existence of anti-trust laws based on theory that government is solely responsible for coercive monopoly)