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The theory of contestable markets was developed by William Baumol, John Panzar, and Robert Willig (1982) in their seminal work Contestable Markets and the Theory of Industry Structure. The theory transformed the way economists think about competition by arguing that what matters for competitive outcomes is not the number of firms in a market, but the threat of potential entry. A market can deliver competitive outcomes even with very few firms, provided the market is contestable.
A market is perfectly contestable if:
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