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What is the difference between competitiveness and contestability?

Competitiveness is what is says on the tin really - if there are many firms in an industry each with a similar degree of market power, the market is competitive. 

Contestability is something a little more subtle. It is the perceived threat of competition. For example, an industry may be an oligipoly, where there are only a few firms each with a large degree of market power. However, if there are low barriers to entry (i.e. low sunk costs, low costs of red tape) - basically if it's easy for new firms to enter the industry - incumbent firms will act as if there is actual competition. Contestability is all about the perceived threat of new firms entering the market and taking away some of the market power of incumbent firms.

Shayantan C. A Level Maths tutor, A Level Further Mathematics  tutor,...

2 years ago

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