For a contestable market to exist there must be low barriers to entry and exit so that new suppliers can come into a market to provide fresh competition to established businesses
Key conditions for a contestable market
Are there Differences between Contestable Markets and Perfect Competition?
Yes! It is important to realise that contestable markets are different from perfect competitive markets.
For example, it is feasible in a contestable market for one firm to have price-setting power and for firms in a market to produce a differentiated product.
There are three main conditions for pure market contestability:
Sunk Costs – a Barrier to Contestability
Barriers to market contestability exist when there are sunk costs i.e. costs that have been committed by a business and cannot be recovered once a firm has entered the industry.
Increasing Contestability of Markets
In recent years a growing number of markets and industries have become genuinely contestable.
Several factors explain this development:
UK pubs group JD Wetherspoon announced plans to triple sales of coffee and breakfasts over the next 18 months, as it seeks new sources of growth as pubs come under increased competition from cheap supermarket dealsDeloitte Monday Briefing (March 2015)
The contestable market for parcel services
A good example of an increasingly contestable industry is the market for parcel services in the UK. For many years Royal Mail has dominated the sector. But now the part-privatised post service also faces stiff competition in its main UK parcels market from rivals including UPS, TNT and Yodel.
Amazon has recently expanded it's own delivery network to add competitive pressure to existing players and there are many smaller operators such as Shutl (recently bought by eBay) which offers same day delivery for parcels to household and business customers.
Contestable market for e-fit devices
In 2015, Microsoft announced the launch of the Band, a rival product to the Moto 360 and other fitness trackers such as Nike's FuelBand
Key evaluation points