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

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  • Ian Gale
  • Daniel P. O'Brien

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)

Suggested Citation

  • Ian Gale & Daniel P. O'Brien, 2013. "The Welfare Effects of Use-or-Lose Provisions in Markets with Dominant Firms," American Economic Journal: Microeconomics, American Economic Association, vol. 5(1), pages 175-193, February.
    • Handle: RePEc:aea:aejmic:v:5:y:2013:i:1:p:175-93
    Note: DOI: 10.1257/mic.5.1.175
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    References listed on IDEAS

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    1. repec:bla:jindec:v:49:y:2001:i:2:p:137-60 is not listed on IDEAS
    2. Riordan, Michael H, 1998. "Anticompetitive Vertical Integration by a Dominant Firm," American Economic Review, American Economic Association, vol. 88(5), pages 1232-1248, December.
    3. Krishna, Kala, 1993. "Auctions with Endogenous Valuations: The Persistence of Monopoly Revisited," American Economic Review, American Economic Association, vol. 83(1), pages 147-160, March.
    4. Gale, Ian, 1994. "Price competition in noncooperative joint ventures," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 53-69, March.
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    Cited by:

    1. Valdes, Victor & Gillen, David, 2018. "The consumer welfare effects of slot concentration and reallocation: A study of Mexico City International Airport," Transportation Research Part A: Policy and Practice, Elsevier, vol. 114(PA), pages 256-269.
    2. James Reitzes & Brendan McVeigh & Nicholas Powers & Samuel Moy, 2015. "Competitive Effects of Exchanges or Sales of Airport Landing Slots," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 46(2), pages 95-125, March.
    3. Antelo, Manel & Bru, Lluís, 2022. "Optimal capacity allocation in a vertical industry," MPRA Paper 113984, University Library of Munich, Germany.
    4. Zenger, Hans, 2013. "Competition and collusion with fixed output," Economics Letters, Elsevier, vol. 120(2), pages 259-261.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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