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Contesting Contestability and the Efficiency of Wages

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Author Info

  • Andrew E. Burke

    (University of St. Andrews)

  • Theodore To

    (University of St. Andrews)

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 barriers 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 EconWPA in its series Industrial Organization with number 9706005.

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Length: 17 pages
Date of creation: 21 Jun 1997
Date of revision:
Handle: RePEc:wpa:wuwpio:9706005

Note: Type of Document - LaTeX DVI file; prepared on PC-TEX; to print on any; pages: 17 ; figures: none
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Web page: http://128.118.178.162

Related research

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

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  1. 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.
  2. 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.
  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. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
  5. 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.
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