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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.

Suggested Citation

  • 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. Kox, Henk L.M. & Leeuwen, George van, 2012. "Dynamic market selection in EU business services," MPRA Paper 41016, University Library of Munich, Germany.
    2. Marius Schwartz, 1996. "Telecommunications Reform in the United States: Promises and Pitfalls," Industrial Organization 9607001, EconWPA.
    3. 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.
    4. 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.
    5. 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).
    6. Carlos Diaz & Raimundo Soto, "undated". "Open-Access Issues in the Chilean Telecommunications and Electricity Sectors," ILADES-Georgetown University Working Papers inv124, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
    7. Bernardo Batiz-Lazo & Douglas Wood, 2003. "Corporate strategy for Mexican banks and market contestability," Industrial Organization 0301014, EconWPA.
    8. 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.
    9. 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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