The theory of contestable markets: Digital platforms

Abstract

A perfectly contestable market is characterized by free entry and free exit costs and is susceptible to hit-and-run entry by potential entrants. The theory of contestable markets is more effective in determining the price and output than the theory of perfect competition where these are determined by the number of sellers in the industry. Similar to the non-existence of a perfectly competitive market, there exists no perfectly contestable market. The threat of potential entry into the market regulates the behaviour of incumbents and minimizes the need for government intervention, though there is a need to keep the entry and exit costs/barriers low. In this study, an attempt was made to analyse the applicability of the conditions of perfect.