Abstract
The theory of contestable markets emphasizes that the ease of entry rather than the number of existing firms forces incumbents to set prices at optimal levels. The policy implications of this work contrast sharply with past U.S. regulatory and antitrust policies, legitimizing increased industry concentration and decreased regulation. This paper explores three factors that influence the desirability of regulation or antitrust policy despite the apparent existence of a contestable market time lags, technological change, and cyclical macroeconomic fluctuations. Time lags enable incumbents to earnsupra-normal profits and take last-minute action to forestall entry. New technologies can create sunk costs that reduce the contestability of a market. Recessions can depress capital markets, raising the cost of exit, while expansion creates opportunities for entry without threatening monopolistic prices. These shortcomings limi the ability of contestability theory to provide guidelines for the regulation of actual industries.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Baumol, W.F., F.C. Panzar, and R.D. Willig,Contestable Markets and the Theory of Industry Structure, New York: Harcourt Brace Jovanovich, Inc., 1982.
Brock, W.A., “Contestable Markets and the Theory of Industry Structure: A Review Article,”Journal of Political Economy, December 1983,91, 1055–66.
Dixit, A., “Recent Developments in Oligopoly Theory,”American Economic Review, Papers and Proceedings, May 1982, 72, 12–17.
Federal Trade Commission,Economic Report of Food Chain Selling Practices in the District of Columbia and San Francisco (Washington, D.C., 1969).
Goldberg, V.P., “Regulation and Administered. Contracts,”The Bell Journal of Economics Autumm '76, 7, No. 2, 426–48. 12.
Gort, M., “Analysis of Stability and Change in Market Shares,”Journal of Political Economy, February 1963, 51–61.
Heggestad, A.A., and S.A. Rhoades, “Competition and Firm Stability in Banking,”Review of Economics and Statistics, November 1976, 443–52.
Phillips, A.,Market Structure, Organization and Performance, (Cambridge, Mass.: Harvard University Press), 1962, pp. 99–118.
Schmalensee, R., “Antitrust and the New Industrial Economics,”American Economic Review, Papers and Proceedings, May 1982, 72 24–28.
Schumpeter, J.A.,Capitalism, Socialism, and Democracy, 3rd ed., New York: Harper and Row, 1950.
Schwartz, M. and Reynolds, R.J., “Contestable Markets: An Uprising in the Theory of Industry Structure: Comment,”American Economic Review, June 1982, 73, 488–90.
Shepherd, W.G., “Contestability' vs. Competition,”American Economic Review, September 1984, 74, 572–87.
Shepherd, W.G., “Competition and Sustainability,” in T.G. Gies and W. Sichel, eds.Deregulation: Appraisal Before the Fact Ann Arbor: University of Michigan Business School, 1982.
Spence, A.M., “Contestable Markets and the Theory of Industry Structure: A Review Article,”Journal of Economic Literature, September 1983, 21, 981: 90.
Walton, C.C., and F.W. Cleveland, Jr.Corporations on Trial: The Electric Cases (Belmont, Calif.: Wadsworth, 1964), p. 52.
Weitzman, N.L., “Contestable Markets: An Uprising in the Theory of Industry Structure: Comment,”American Economic Review, June 1982, 73, 486–87.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Helwege, A., Hendricks, A. Three problems in applying contestability to regulated markets. Rev Ind Organ 2, 132–143 (1985). https://doi.org/10.1007/BF02354217
Issue Date:
DOI: https://doi.org/10.1007/BF02354217