Contestable Market:
William Baumol is credited with the discovery of this kind of market situations. A perfectly contestable market is different from perfectly competitive. markets since only one or two firms may represent the supply side of the market. It differs from perfect monopoly in the sense that firms can freely enter and exit the market without any additional cost. Such a contestable market exists because of economies of scope. One reason for the advent of natural monopoly is internal economies of scale enjoyed by a
firm. However, in case market demand is large enough so that no firm really stays within the range of economies of scale, natural monopoly is not feasible since one firm faces rising cost schedule, inviting more firms to enter the market. However, for a multi- product firm enjóying economies of scope, even if economies of scale is absent, strong economies of scope may still make one firm the least cost provider in the market. But there is no barrier to entry of other firms who may enter or exit for a short span of time. Baumol called this type of market as contestable, although just like competitive markets, it is not easy to find examples for such markets. However, the policy implication of such a market is that government may not impose regulation on this market since it does not have entry barriers.
0 Comments