Contestability, Queues, and Governmental Entry Deterrence

Stephen Shmanske

Public Choice, 1996, vol. 86, issue 1-2, 15 pages

Abstract: This paper demonstrates that a perverse kind of entry deterrence can result when government subsidized production is combined with non-price rationing in the form of queuing. Even though queuing leads to a total cost to the consumer (not including the tax cost) that is higher than the cost of an unsubsidized private supplier, and even though the government's money price is rigid, the market is not contestable. The key to the result is that the waiting cost portion of the consumer's acquisition cost declines immediately upon entry and losses would be forced upon the entrant. Privatization would negate the entry deterrence, thus leading to entry, increased output at lower full prices, lower average production costs, decreased waiting costs, increased profits, and increased consumer surplus. Copyright 1996 by Kluwer Academic Publishers

Date: 1996
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