4. CONTESTABILITY THEORY

We have just seen that – under certain conditions – the representatives of the Chicago approach would not be intrigued by high market shares of a limited number of competitors. Quite to the contrary, they would argue that because these competitors are more efficient, they have been able to grow at the expense of their less efficient competitors. We now turn to the theory of contestable markets that was developed in the early 1980ies and whose representatives also claim that – under certain conditions – market structure is not a good predictor of the performance to be expected in a particular market. Formulated differently: although a market might be described by
a narrow oligopoly or even a monopoly, this does not necessarily have to stand in the way of allocative efficiency. Contestability theory can thus also be read as a critique of the Harvard approach.