A contestable market is a market in which companies can enter or exit the market without facing significant barriers. In a contestable market, there are no sunk costs and no economies of scale, so companies can enter or exit the market very easily. This makes the market very competitive and forces companies to be efficient in order to survive.
There are two key characteristics of a contestable market:
1. There are no significant barriers to entry or exit – This means that any company can enter or exit the market very easily. There are no sunk costs and no economies of scale, so there is nothing stopping new companies from entering the market.
2. The market is very competitive – With so many companies competing for customers, companies must be efficient in order to survive. This forces companies to innovation and find ways to cut costs.