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Contesting Contestability and the Efficiency of Wages

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  • Andrew E Burke
  • Theodore To

Abstract

The fundamental contribution of the paper is to contest the view that greater market contestability has non-negative effects on market performance. In a model where employees pose a threat of potential entry, we demonstrate that a reduction in barriers to entry causes no fall in industry price when incumbents are able to buy-off potential entry through higher wages. Over the longer term the analysis illustrates that increased market contestability can cause equilibrium industry price to be higher than that which would have occurred if entry bariers had persisted at their initial higher level. Correspondingly, the model indicates that investment in endogenous barriers to entry and wage ceilings on executive salaries may enhance market performance.

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Bibliographic Info

Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9707.

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Date of creation: Oct 1997
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Handle: RePEc:san:crieff:9707

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Related research

Keywords: barriers to entry; market contestability; antitrust regulation; executive;

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  1. Conyon, Martin J., 1994. "Labour's share, market structure and trade unionism," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 117-131, March.
  2. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Sticking it Out: Entrepreneurial Survival and Liquidity Constraints," NBER Working Papers 4494, National Bureau of Economic Research, Inc.
  3. Baumol, William J & Willig, Robert D, 1986. "Contestability: Developments since the Book," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 9-36, Suppl. No.
  4. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
  5. Black, Jane & de Meza, David & Jeffreys, David, 1996. "House Price, the Supply of Collateral and the Enterprise Economy," Economic Journal, Royal Economic Society, vol. 106(434), pages 60-75, January.
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