Contesting Contestability and the Efficiency of Wages
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.
|Date of creation:||21 Jun 1997|
|Date of revision:|
|Note:||Type of Document - LaTeX DVI file; prepared on PC-TEX; to print on any; pages: 17 ; figures: none|
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NBER Working Papers
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