Commitment, sunk costs, and entry to the airline industry: Reflections on experience
Industrial economics has enjoyed a new popularity since the mid-1970s. Primarily because of practical issues raised by deregulation in the USA, notably of telecommunications, airlines and road haulage, academic minds have become engaged in more rigorous statements about the welfare implications of changes in rules affecting these industries. Dixit (1982) found that ‘Research in oligopoly theory has grown so rapidly that…I can highlight only one or two important new developments.’ Two developments were, indeed, in issues central to regulation. One was ‘strategic behaviour yielding credible threats of entry deterrence’; the other was ‘the strategic specification of conditions under which all such threats are empty’. A special case of this was the conditions for ‘contestable markets’ specified in the work of Baumol et al. (1981).