4.2. Policy Implications

The insights gained by adherents of contestability theory indicate that there was great potential to deregulate telecommunications, the airline industry, but also railways and public utilities. With regard to competition policy, the insights mean that even monopolies with high fixed costs could be accepted because from a welfareeconomic point of view, the equilibrium described above is the best achievable one given production technology (price equals marginal costs could only be achieved if the state was to pay subsidies to the natural monopolies).

A more general conclusion from contestability theory is that market structure can be entirely irrelevant for the outcomes to be expected on a particular market. Antitrust agencies should thus inquire into the possibilities of potential entrants to constrain the price-setting behaviour of incumbents. Narrow oligopolies would not be suspect as such but only if high barriers to entry prevent potential competitors from controlling effective competitors in their behaviour.