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Updated: May 14, 2025
In other words, even monopolists behave as though their market was fully competitive, their production and pricing decisions and actions constrained by the "ghosts" of potential and threatening newcomers. While intellectually tempting, contestability theory has little to do with the rough and tumble world of business. Contestable markets simply do not exist.
These and other insights were incorporated in a theory of market contestability. Contrary to classical economic thinking, monopolies and oligopolies rarely raise prices for fear of attracting new competitors, went the new school. This is especially true in a "contestable" market where entry is easy and cheap.
Therefore, the question of mutual monitoring and control is a key issue in collusive oligopolies." Monopolies and oligopolies, went the contestability theory, also refrain from restricting output, lest their market share be snatched by new entrants.
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