Contestable Market Theory

It must be nice to be an economist who dabbles in theory. You don’t have to deal with the real world. You can just talk about how things would operate without human behavior...mucking it all up.

Take contestable market theory. Contestable market theory operates on a theoretical structure of markets where there are no barriers to entry and no exist costs from the industry. You know…the complete opposite of the real world.

The argument is that the lack of these constraints will create a naturally competitive market, even in a state where a monopoly or oligopoly exists.

American economist William Baumol’s theory (and yeah, it’s just a theory) says that natural competition will exist due to a threat of new entrants to the market...even in a market with few operators...if government regulation or high capital costs exist. The contestable market also features no sunk costs, and equitable access to technology.

Naturally, criticism exists, because there is no such thing as a market with neither barriers to entry nor exit barriers from the space.

This whole thing carries as much weight as the argument that socialism is benevolent, minus…you know…all the tyrannical human behavior that has been inevitable in socialist societies.