can contend that air travel and tourism are complementary goods, thus it‟s a basic economic argument that
when the price of a complementary good falls, the demand for its counterpart increases. Its estimated that airlinederegulation in the Irish market is correlated to a 60% rise in visitor numbers and accounted for 25,000 new jobsin tourism between 1987-1993 (Barrett, 1996, 1997).It is also asserted that the most recent progression of deregulation, the EU/US open skies agreement, will havemacroeconomic benefits for Ireland by facilitating free trade, and due to the coupling of Irish and US economies(Barrett, 2008a).
The Airline Industry and Contestability
Proponents of airline deregulation used contestable market theory, and the assertion that such would beapplicable to the aviation industry, to bolster their case (Borenstein, 1992). It is now appropriate to examine thecompetitive market structure to identify whether these assertions came to fruition.Contestable market theory can be considered as a substitute for perfect competition, in that it was devised byBaumol, Panzar and Willig (1982) to reconcile realistic market conditions with the efficient outcomes associatedwith perfectly competitive markets (Sinha, 2001; Brock, 1983; Morrison & Winston, 1987). The criteria forcontestability are as follows;
Freedom of Entry;
A new entrant must not face any barriers to entering a new market, including but notlimited to any costs associated with market entrance that are not
borne by the incumbent
(Tye,1990:3; Baumol, 1982; Brock, 1983).
Freedom of Exit;
In a similar fashion incumbents must not face barriers to exiting existing market (Sinha,2001; Baumol, 1982; Barrett, 1999).
Asymmetric Time Lags;
In order to permit what is commonly referred to as “hit and run entry” there must
be sufficient time lags to allow a new or prospective entrant to enter the market, enjoy supernormal profits,and exit before the incumbents are able to engage in predatory pricing thereby eroding all profits to zero(Sinha, 2001; Tye, 1990).The criteria outlined above underpin the central hypothesis of contestable market theory; the threat of potentialentrants disciplines incumbents (Tye, 1990).If we refer back to the earlier analysis of the regulatory transition of the aviation industry, from regulated toderegulated, it becomes apparent that prior to deregulation the criteria for contestability were breached; in boththe US and Irish cases barriers to entry and exit were in place, not in the form of costs per say, but in the form of artificial barriers created by government intervention. Furthermore, deregulation, by permitting freedom of entryand exit, attempted to create a contestable airline industry. The similarity between the measures of deregulationand the criteria for contestability was not lost on Baumol and Willig;
some remarkable decisions in the regulatory and antitrust arenas [that] rely explicitly on the theory of contestability
(Tye citing Baumol & Willig, 1990:1).While theoretically the deregulated airline industry is consistent with the theory of contestability, we mustquestion whether the same is true in practice. While Graham et al (1983), Bailey et al (1985), Moore (1986) and
(Sinha, 1987) all find evidence to suggest that in practice contestability isn‟t applicable to the airline industry,
there are studies which support the assertion, namely Bailey and Panzar (1981) and Morrison and Winston(1986) (Sinha, 2001; Borenstein, 1992; Hurdle et al, 1989).Interestingly, Morrsion and Winston (1986, 1987) use
) version of „imperfect contestability‟,meaning that while the threat of potential entry doesn‟t guarantee a welfare maximizin
g outcome, as in the caseof perfect contestability, it does influence the behaviour of incumbents (Sinha, 2001; Hurdle, 1989; Morrison &Winston, 1987; Baumol, 1982). There is evidence supporting the hypothesis that the airline industry isconsistent with imperfect contestability (Morrison & Winston, 1986, 1987). This being said there seems to beconsensus around the argument that actual competition
“plays a more significant role”
than the threat of potential competition (Sinha, 2001:119). This is illustrated in the Irish case on the remaining Irish- UK rountes;despite the fact that deregulation had already begun and indeed succeeded in 1986, the remaining routes werenot contestable.