Contestability in the Digital Music Player Market

We test the concept of contestability in the digital music player market. The theory suggests that the threat of new entrants keeps firms' market power in check. But Baumol and others argue that pure contestable markets rarely happen in reality. The portable music player market has been dominated by one producer. We estimate a quality-adjusted price index from 2002 to 2010. Results show that market prices decline at an average rate of about 20 percent per year, which is similar to other IT products. This provides support for the idea that the market is fairly contestable.