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American Economic Journal: Microeconomics: Vol. 5 No. 1 (February 2013)

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The Welfare Effects of Use-or-Lose Provisions in Markets with Dominant Firms

Article Citation

Gale, Ian, and Daniel P. O'Brien. 2013. "The Welfare Effects of Use-or-Lose Provisions in Markets with Dominant Firms." American Economic Journal: Microeconomics, 5(1): 175-93.

DOI: 10.1257/mic.5.1.175

Abstract

A use-or-lose provision requires that firms employ a certain minimum fraction of their productive capacity. Variants have been used by regulators in the airline and wireless communications industries, among others. A typical stated objective is to limit capacity hoarding, thereby increasing aggregate output and welfare. When the dominant firm is more efficient than fringe firms, we find that imposing a use-or- lose provision induces the dominant firm to acquire capacity from the fringe, which causes aggregate output to fall. When the dominant firm is less efficient than the fringe, aggregate output rises. In both cases, total surplus may rise or fall. (JEL D43, K21, L13, L93)

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Authors

Gale, Ian (Georgetown U)
O'Brien, Daniel P. (US Federal Trade Commission)

JEL Classifications

D43: Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection
K21: Antitrust Law
L13: Oligopoly and Other Imperfect Markets
L93: Air Transportation

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