Chapter 6: Market Conduct of Dominant Firms II
127 contestable markets, emphasizes the controlling influence that the threat of entry can have under certain conditions on the behaviour and performance of firms which may appear to dominate a market. The theory is outlined in Section II, while Section III gives a brief discussion of antitrust cases where the theory has had some role. The second development, strategic behaviour to deter entry, in which incumbent firms may make a variety of expenditures to demonstrate to any potential entrants their determination to maintain their position, is then discussed at some length in Section IV. The impact of strategic behaviour on antitrust policy is considered in Section V. However, the subject can pose difficult problems for the policy maker precisely because the behaviour in question is often that expected in a competitive market. II Contestability and potential competition In the opening chapter we referred to market power as the ability of an incumbent firm persistently to maintain prices above long-run marginal and average cost. A central purpose of antitrust policy is to reduce or eliminate the exercise of market power. What the theory of contestable markets does is to erect a framework of analysis where market power is completely absent. In the extreme case of a perfectly contestable market, the performance of the incumbent firms, even if they number only two, is the same as those operating in perfect competition, and there is no need for antitrust, or indeed regulatory, policy at all. The theory casts potential competition in the leading...
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