Van Witteloostuijn, A. (1990). Contestability and investment in average cost reduction European Journal of Political Economy, 6(1):23--40.
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Affiliated author
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Publication year1990
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JournalEuropean Journal of Political Economy
The current pillar of the assumption of free entry and (costless) exit is perfect contestability. The perfect contestability framework serves well as a static benchmark case of competition. However, existing contestable market models fail to endogenize technological progress. The purpose of this paper is twofold: first, technological progress is endogenized in a contestability setting; and, second, it is argued that even with a positive sunk cost contestability can be guaranteed. The focus is on a special case of investment: reduction of average cost.