Contestable Markets and Minimum Efficient Scale

The nature of costs in an industry will influence how contestable it is.

When the minimum efficient scale is a small percentage of total market demand, there is room for plenty of businesses to reach productive efficiency in the long run and larger firms will have only a limited cost advantage to challenger businesses. This means that the market is likely to be highly contestable.

In contrast, when there are significant economies of scale and a business can reduce their long run unit costs by scaling up production, established businesses will have a large cost advantage and the market will become less contestable and more highly concentrated.