What does it mean for a market to be "contestable"?

A contestable market is characterized by the ease with which new competitors can enter the market. This concept emphasizes the potential for competition rather than the current level of competition. In a contestable market, if there are no significant barriers to entry or exit, potential competitors can enter the market if they perceive an opportunity to profit, even if the market is currently served by existing firms.

The idea is that the mere possibility of new entrants can influence the behavior of existing firms, as they may lower prices or improve their services to deter potential competition. This dynamic helps maintain competitive conditions even if the market currently has few players. Hence, a market that allows potential competitors to enter freely embodies the essence of contestability, ensuring that firms must remain efficient and responsive to customer needs.

In contrast, a market with fixed sellers and buyers typically lacks the fluidity necessary for contestability, as does a market characterized by high costs that deter new entrants. Lastly, a market dominated by a single provider indicates a monopolistic scenario, which is antithetical to the concept of contestability.