Entry Deterrence and Contestable Markets
The threat of entry will force a monopolist to charge a price that is closer to the one that would occur in a market with many firms.
- The threat of entry underlies the theory of market contestability. Firms can enter or leave a contestable market when the cost of entry is insignificant.
- In the extreme case of perfect contestability, firms can enter and exit at zero cost, and the market price would be the same as the perfectly competitive price.