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The Nature and Scope of Contestability Theory

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  • Schwartz, Marius

Abstract

Contes tability theory suggests that threat of entry may prevent monopolistic pricing e ven in a concentrated market because, if exit from the market is easy, monopolis tic pricing would induce hit and run entry. This paper shows that, despite easy exit, hit and run entry is unprofitable if incumbents' price responses are suffi ciently rapid. Only market data (not experimental) can reveal whetherresponses are sufficiently rapid; available evidence indicates they are. Another version o f contestability theory stresses threat of entry through long-term contracts. Th is threat, too, is shown to be unlikely to check monopolistic pricing. Copyright 1986 by Royal Economic Society.

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  • Schwartz, Marius, 1986. "The Nature and Scope of Contestability Theory," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 37-57, Suppl. No.
    • Handle: RePEc:oup:oxecpp:v:38:y:1986:i:0:p:37-57
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    Cited by:

    1. Rajeev K. Goel & Ummad Mazhar & James W. Saunoris, 2020. "Business operations, contestability, bureaucratic holdup, and bribe solicitations," Review of Development Economics, Wiley Blackwell, vol. 24(4), pages 1484-1510, November.
    2. Rajeev K. Goel & Ummad Mazhar & James W. Saunoris, 2018. "Market Contestability and Bribe Solicitations: Evidence Across Stages of Firms' Operations," CESifo Working Paper Series 6981, CESifo.
    3. Kox, Henk L.M. & Leeuwen, George van, 2012. "Dynamic market selection in EU business services," MPRA Paper 41016, University Library of Munich, Germany.
    4. Utteeyo Dasgupta, 2009. "Potential competition in the presence of sunk entry costs: an experiment," New Zealand Economic Papers, Taylor & Francis Journals, vol. 43(2), pages 203-225.
    5. Keizer, P.K. & Muysken, J., 1997. "The future of the welfare state : reflections on Rogernomics," Research Memorandum 009, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    6. Marius Schwartz, 1996. "Telecommunications Reform in the United States: Promises and Pitfalls," Industrial Organization 9607001, University Library of Munich, Germany.
    7. Maria Goddard & Russell Mannion, 1998. "From competition to co‐operation: new economic relationships in the National Health Service," Health Economics, John Wiley & Sons, Ltd., vol. 7(2), pages 105-119, March.
    8. Paech, Niko P., 1998. "Contestability reconsidered: The meaning of market exit costs," Journal of Economic Behavior & Organization, Elsevier, vol. 34(3), pages 435-443, March.
    9. T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, June.
    10. Kox, Henk L.M. & van Leeuwen, George, 2013. "Market selection and scale inefficiency – A new methodology applied to EU business services," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 77-94.
    11. Sheldon, Ian M., 2008. "The Biotechnology Sector: "Bounds" to Market Structure," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6078, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    12. Carlos Diaz & Raimundo Soto, "undated". "Open-Access Issues in the Chilean Telecommunications and Electricity Sectors," ILADES-UAH Working Papers inv124, Universidad Alberto Hurtado/School of Economics and Business.
    13. Bernardo Batiz-Lazo & Douglas Wood, 2003. "Corporate strategy for Mexican banks and market contestability," Industrial Organization 0301014, University Library of Munich, Germany.
    14. Office of Health Economics, 1998. "Competition and contestability between acute hospitals," Monograph 000433, Office of Health Economics.
    15. Kox, Henk L.M. & Leeuwen, George van, 2011. "Measuring dynamic market selection by persistent scale inefficiencies - new methodology applied to EU business services," MPRA Paper 34986, University Library of Munich, Germany.
    16. Claudio E. V. Borio & Renato Filosa, 1994. "The changing borders of banking: trends and implications," BIS Working Papers 23, Bank for International Settlements.

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