Contestability: A Revisionist View

Actual and potential competition in international telecommunications

“…We assume that given relatively slow moving prices, ISR reduces sunk entry costs and increases the potential 2 Potential competition has long been recognized by theory as an important, albeit imperfect, control for market power in oligopoly markets. See Clark (1908), Bain (1956), Cairns and Mahabir (1988), Gilbert (1989), and van Wegberg and van Witteloostuijn (1992).…”

Product innovation and contestability

“…describes five scenarios where the introduction of sunk cost does not violate the free entry condition. Recent models that support investment contestability are Kim (1987), Cairns andMahabir (1988), Calem (1988), Maskin andTirole (1988),Mills (1988), Rashid (1988) and Van Witteloostuijn and Maks (1988). Here it suffices to point to one illustrative ex-2 The term contestability is retained, since investment contestability, as perfect contestability, assumes that external competition dominates over internal competition.…”

“…For example, Shepherd (1984) and Green (1987) Green supports Shepherd's view by asserting that 'one might justifiably question the relevance of the contestable market paradigm for competition policy on the grounds of nongenerality, if it were not for the growing influence of foreign competition' (p. 485). Cairns and Mahabir (1988) even argue that the validity of an assumption of contestability increases if sunk investment is permitted. Here they point to 'an already existing firm in a market which is a prototype of the market to be contested' (p. 270).…”

“…Reciprocal entry (threats) introduce(s) complicated strategic interactions. For example, nonbinding (excess) capacities imply a threat of reciprocal dumping (Pinto 1986), whereas binding productive capacities introduce a home market disequilibrium if entry is undertaken (Cairns and Mahabir 1988). These complications are ignored by assuming, first, zero opportunity cost of entry and, second, one-sided entry threat.…”

“…In a contestable environment, the introduction of product variety can be adopted as a competitive weapon, either to deter entry or to enter (Kim 1987, Cairns and Mahabir 1988and Rashid 1988. In the literature product differentiation is often simply restricted to a unidimensional quality continuum (Kihlstrom and Levhari 1977 …”