A Contestable Market is a market structure where is freedom of entry and exit that companies with few rivals behave in a competitive manner when the market they operate in has weak barriers to entry. The Contestable Market is a market whereby companies can enter and leave freely with low sunk costs that is the irrecoverable costs to enter an industry such as the purchase of a manufacturing plant or equipment.
Reference Definition by OECD: A Contestable Market is one in which the following conditions are satisfied: a) there are no barriers to entry or exit; b) all firms, both incumbent and potential entrants, have access to the same production technology; c) there is perfect information on prices, available to all consumers and firms; d) entrants can enter and exit before incumbents can adjust prices. In contrast to perfect competition, a contestable market may have any number of firms (including only one or a few) and these firms need not be price-takers. The analysis of contestable markets is designed for cases in which the existence of scale economies precludes a large number of competitors.
