The significance of market contestability for the performance of an industry
A contestable market is one where new firms can enter and exit easily. Even a single dominant firm behaves competitively because rivals can always move in and undercut it.
Formula
Contestability ∝ 1 / (Barriers to Entry + Sunk Costs)
Real World
The UK airline industry is highly contestable — when a profitable route appears, low-cost carriers like Jet2 can quickly deploy aircraft to it, forcing incumbents to keep fares competitive even without actual entry occurring.
Exam Focus
Stress the role of the 'threat' of entry, not actual entry — this distinction separates strong answers from weaker ones in contestability questions.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
How well did you know this?