The Theory of Contestable Markets: Applications to Regulatory and Antitrust Problems in the Rail Industry

By William B. Tye | Go to book overview

5
Conclusions on Recent Applications of Contestability Theory

The initial vision of the theory of contestable markets was to provide "a standard of welfare-maximizing structure and behavior." The "unifying analytical structure" of contestability theory "aspire[s] to no less than a unifying theory for the analysis of industrial organization." In applications of the theory, regulators were told that firms facing the threat of contest- ability would voluntarily adopt Ramsey optimal price structures and regulators should act as a "surrogate for competition unimpeded by entry barriers."

In many applications of the theory, however, perfectly contestable markets did not serve as the promised benchmark for measuring departures from the welfare optimum. Indeed, movements away from contestability were labeled as welfare enhancing. Movements toward greater contest- ability purportedly reduced the feasible set of Ramsey prices and thus welfare, either by enhancing buyer defenses to evade the income transfer schemes inherent in the price discrimination or by creating incentives for profitable entry at prices above marginal costs. Movements toward perfect contestability were believed to deprive incumbents of the sunk costs, cross- subsidies, and other barriers to entry and price competition believed needed for firm viability and sustainability and to give full latitude to welfare-enhancing price discrimination. Conversely, restraints on contest- ability were justified as expanding the price set available for the Ramsey pricing monopolist to achieve static efficiency gains.

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The Theory of Contestable Markets: Applications to Regulatory and Antitrust Problems in the Rail Industry
Table of contents

Table of contents

  • Recent Titles in Contributions in Economics and Economic History ii
  • Title Page iii
  • Contents vii
  • Preface ix
  • 1 - Lntroduction 1
  • Notes 24
  • 2 - Vertical Mergers into Contestable Markets 29
  • Notes 45
  • 3 - Sunk Costs, Transactions Costs, and Vertical Foreclosures in the Rail Industry 51
  • Notes 82
  • 4 - Determination of Market Dominance and Maximum Reasonable Rates in the Transition to Deregulation 93
  • Conclusion 115
  • Notes 116
  • 5 - Conclusions on Recent Applications of Contestability Theory 119
  • Note 128
  • References 129
  • Index 139
  • About the Author 145
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