IS THE AIRLINE INDUSTRY A NATURAL MONOPOLY 179 that would benefit both the producers and the consumers (if the cost efficiencies are reallocated on the demand-side through lower fares, higher quality and innovation). 2.1. The Theory of Contestable Markets in the Airline Industry: “Capital on Wings” The general theory of contestable markets came up as a complementary approach to the of perfect competition theories. According to the Chicago School, firms are encouraged to seek cost efficiency in their production as these efficiencies are supposed to support the achievement of social welfare. Consequently, state regulation and competition law should be considered undesirable or limited. This theory was introduced by Baumol, Panzar and Willig18. The hallmark of contestable markets is free entry and free exit. A market is said to be perfectly contestable when it is possible to enter and exit this market without incurring any barrier and sunk costs (capital losses beyond depreciation, marketing and advertising expenses, resale of materials and so on). When it is possible for a new entrant to locate in a market currently in a monopoly position, this threat forces the incumbent operator to compete. The exit must also be free for the market to be contestable (the company can withdraw from the competition without excessive losses, which makes it possible to take the risk of entering the market). In case of a high degree of market dominance or even monopoly, perfect contestable markets would achieve the same features as a market with perfect competition because potential entrants would exercise a competitive constraint over the monopolies or oligopolies. The required infrastructure in the airline sector is different from airports or other natural monopolies such as network utilities. Aircraft can be leased or re-routed to other markets. The fact that aircrafts can constitute “flying capital”, as well as easily leased and mobile assets, contributed to this belief that airline capital costs are not sunk costs19. Airplanes are the main assets and their acquisition represents significant market entry costs can be acquired on leasing. This formula is flexible since they can be returned or used on other routes. Airlines would then be able to enter markets without deterrent cost in terms of expected profitability: 18 Baumol, William, Panzar, John & Willig, Robert, 1982, “Contestable Markets and the Theory of Industry Structure” New York: Harcourt Brace Jovanovich, Inc. 19 Bailey & Panzar, 1981, “The Contestability of Airline Markets, during the Transition to Deregulation”, 44 Law and Contemporary Problems, 125 ff.
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