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The Theory of Contestable Markets describes how markets served by a small number of firms with low barriers to entry can still have competitive pricing. In a contestable market, the presence of potential entrants to the market does not allow firms to earn excess profits, as the potential entrants will enter the market, hoping to take advantage of the high price level.


Low cost airlines are cited as an example of a contestable market. If these airlines increase their prices too much, new entrants have the option of leasing aircraft, cheaply entering the market, and exploiting the high price level.

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