Contesting Contestability and the Efficiency of Wages

Andrew Burke and Ted To

Industrial Organization from University Library of Munich, Germany

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.

Keywords: barriers to entry; market contestability; antitrust regulation; executive salaries (search for similar items in EconPapers)
JEL-codes: K21 L12 L13 L41 L51 (search for similar items in EconPapers)
Pages: 17 pages
Date: 1997-06-21
Note: Type of Document - LaTeX DVI file; prepared on PC-TEX; to print on any; pages: 17 ; figures: none
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