India’s Stifling Regulations (an ongoing series)

What theory supports this regulation?

Kingfisher, which is a full- service airline, commenced operations in May this year. The airline will only be allowed to operate international flights in 2010, following India’s civil aviation regulation which requires new airlines to serve domestic market for five years before flying overseas. [NST]

1 thought on “India’s Stifling Regulations (an ongoing series)

  1. econgeek

    > “What theory supports this regulation?”

    I think that would likely be any theory of oligopolies that (rightly) takes into account the fact that airplanes are lumpy enough capital investments to create some monopoly rents and thus attempts to use cross-subsidies between domestic (making it cheaper than the market price) and international travel (making it more expensive) to improve wellfare in some way shape or form I am not sure how exactly the welfare improvement in this particular case would work, but you can read on the pre-liberalised US airline market and youll get a much better argument than I could ever muster with a straigh face.

    The above analysis is now known to be wrong, and we have known so for over 20 years. What they are missing is “contestable markets theory.” While a airplane is indeed lumpy, it can be switched between city pairs with relatively small costs, and thus any city pair that is serviced with suficiently high monopoly rents should attract some other airline to service the city pair, until the minimum posible profit that makes the route sustainable is achieved. So the regulation is not necesary.

    The entire idea of contestable markets was not well understood when regulation origininated, and since regulation seems to be sticky, particularly in underdeveloped countries, it has remained in place. An interesting question is why is the regulation sticky?

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