1 / 12

Empirical Implications and Tests of the Contestability Hypothesis

Empirical Implications and Tests of the Contestability Hypothesis. Steven Morrison and Clifford Winston. Presented by Ian Fetters. Introduction. Baumol , Panzar , Willig – if there are no sunk costs for entry and exit, incumbent firm has no choice but to price at welfare-maximizing price

chesmu
Télécharger la présentation

Empirical Implications and Tests of the Contestability Hypothesis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Empirical Implications and Tests of the Contestability Hypothesis Steven Morrison and Clifford Winston Presented by Ian Fetters

  2. Introduction • Baumol, Panzar, Willig – if there are no sunk costs for entry and exit, incumbent firm has no choice but to price at welfare-maximizing price • Airlines are often called contestable markets – are they perfectly or imperfectly contestable?

  3. Empirical aspects of perfect and imperfect contestability • Does presence of potential competitors generate welfare-maximizing performance? • Look at markets which meet technology, demand conditions for contestable markets, are comparable in all respects but potential competitor

  4. Empirical aspects of perfect and imperfect contestability • If markets with potential competitors have welfare-maximizing performance, then market is perfectly contestable • If effect of potential competitors on welfare is significant, but does not generate maximum welfare, market is imperfectly contestable

  5. Lit • Baumol, Panzar, Willig - “it is highly plausible that air travel provides real example of contestable markets” • Moore, Call, Keeler; Graham, Kaplan, Sibley – measures of efficiency depend on number of actual competitors • Bailey, Panzar – in some cases, number of competitors does not influence efficiency

  6. Methodology and data • Use data from 1983 – greater adjustment to deregulation • Use direct measure of consumer welfare – compensating variation – difference between welfare in deregulated environment, optimal welfare • Caves, Christinsen, Tretheway – constant returns to scale for carriers no matter what size, so there is potential for perfect contestability

  7. Perfect contestability • If perfectly contestable, welfare change is equal to 0 if there is at least one potential competitor • “Potential carrier” – serves at least one of the airports involved, but does not serve route

  8. Perfect contestability • 769 randomly selected routes with at least one potential competitor • Mean welfare change: $0.014 per traveler mile ($4.61 for average traveler, total welfare change of $2.5 billion in 1977) • So perfect contestability is not the case • Explanations

  9. Imperfect contestability • Welfare change measure is influenced by both actual, potential carriers, as well as other factors • “Actual competitor” – airline that offers nonstop service or on-line connecting service

  10. Model • DELTA1W = 2.31NN+1.41NS+2.16NM+2.52NL+1.30SS+2.56SM+3.51SL+ (.37) (.32) (.40) (.50) (.32) (.38) (.48) • 2.62MM+3.12ML+3.42LL+.60SLOTDUM+.06PCTBUS-.44ACTUAL-.15PTT (.43) (.46) (.50) (.19) (.005) (.04) (.02) • NN, NS, NM, NL, SS, SM, SL, MM, ML, LL – hub dummies [non, small, med, large] • SLOTDUM – slot dummy • PCTBUS - % of business travelers on route [inelastic demand] • ACTUAL – number of actual competitors • PTT – number of potential competitors

  11. Imperfect contestability • Additional competitors reduce difference between optimal welfare and actual welfare by $0.0044/mile • Potential competitors reduce difference by $0.0015/mile • Conclusion: airlines are imperfectly contestable

  12. Extensions • Effects on welfare of potential carriers might increase as number of actual carriers falls • Insignificant effect of potential carriers until there are at least four potential carriers – “critical mass” is required

More Related