184 COMPETITION LAW IN TOURISM explained by the existence of barriers to entry and the search of a critical size for survival. 3.1. The Limits of the Theory of Contestable Markets and the Remaining Issue of Barriers to Entry A perfect contestable market would mean fares that are set regardless of the number of competitors on a route and that potential competition could be the ideal substitute for actual competition. Notwithstanding, actual competition clearly has an impact on price levels27, as monopoly routes happen to have higher fares than similar duopoly routes. The traditional assumption is that fares are generally higher on routes served by only one airline than they are on routes operated by more carriers. Fares tend to decline significantly with the entry of a second and third competitor. The threat of potential competition may have a limited effect on fares compared to the actual competition pricing. The main reason for this price effect is the existence of barriers to entry that remain even in the post-liberalised markets28. Regulatory barriers to entry are mainly the restrictions in bilateral air service agreements. Within the EU and EEA, regulatory barriers do not play a significant role for EU-based airlines, as traffic rights and capacity restrictions have already been removed. Nevertheless, for non-EU based airlines, carriers still face significant regulatory entry barriers, being structural barriers to entry, such as slot shortages at congested airports, the most significant ones. The EU Slot Regulation29 based on the “use-it-or-lose-it” rule creates a critical barrier to entry for competitors: carriers holding slots are entitled to retain them in the next equivalent scheduling season if they can demonstrate to the slot coordinator that the slots have been operated for at least 80% of the time. Behavioural barriers to entry are based on the reputation of an airline for predatory conduct such as aggressive pricing or capacity increases (frequencies), and, as a consequence, a mix of several barriers can occur. The shortage of airport slots at congested 27 Borenstein, 1990, ‘Airline mergers, airport dominance, and market power’, American Economic Review, 80, 400–4 and Severin Borenstein, 1992. “The Evolution of U.S. Airline Competition,” Journal of Economic Perspectives, American Economic Association, Vol. 6(2), pages 45-73, Spring. 28 Kappes, Jan Willem & Merkert, Rico, 2013, “Barriers to entry into European aviation markets revisited: A review and analysis of managerial perceptions”, Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 57(C), pp 58-69. 29 Council Regulation (EEC) No. 95/93 of 18 January 1993 on common rules for the allocation of slots at Community airports OJ L14, 22.1.1993.
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