Contestable Markets under Uncertainty
Volume: Volume 16, No. 1
Issue: Spring 1985
Pages: pp. 28-40
Authors: Elie Appelbaum and Chin Lim
Title: Contestable Markets under Uncertainty
Abstract: In this article we present a model of a market which is ex post contestable. We show that in a market characterized by uncertainty a firm will face a tradeoff between efficiency and flexibility and generally will make some precommitments to take advantage of ex ante technologies. We show that in the face of potential entry the incumbent will increase his precommitments and in so doing will affect the probability of entry. The degree of market contestability is therefore endogenously determined by the choice of precommitments. The extent to which precommitments will be used to affect entry probabilities is shown to depend on the efficiency of ex ante production, adjustment costs, and the degree of uncertainty. In particular, we show that the market becomes "more contestable" as the relative efficiency of ex post production increases and as market conditions become more uncertain.
JEL Classification
Microeconomics Theory of Firm and Industry under Imperfectly Competitive Market Structures (0226)
Theory of Uncertainty and Information (0261)
Market Structure: Industrial Organization and Corporate Strategy (6110)