Oligopolistic market behavior under deregulation

Abstract

This dissertation provides an alternative framework and hypothesis for the study of olygopoly markets when firms compete against rivals by means of price and quality. For the expositional case of study, we refer to the airline industry whose price, entry, and exit were highly regulated for 40 years (1938-1978). This study is made to analyze the price-quality rivalry game under regulation and deregulation. The analysis proceeds in three stages. First, this dissertation analyzes the quality adjustment process under regulation. Firms are assumed to have imperfect information concerning the cost conditions of their rivals. Market uncertainty owing to imperfect information determines the perceptions held by a firm regarding how its rivals will react to its own actions. With regard to this uncertainty, the dissertation shows: (1) How a firm acquires and uses available information. (2) Departing from the conventional Cournot-Nash conjecture, the model suggests an alternative hypothesis to conjectural variation, which may referred to as - "the cost based cojectural variation." (3) This dissertation suggests the efficient combination of two decision variables of a firm in the process of achieving profit maximization. Second, based on the results of the first stage, this dissertation analyzes the price and quality setting processes of firms when restrictions on price, entry and exit are removed. In addition, the change in market structure by deregulation is examined. This dissertation presents an alternative hypothesis about market leadership related to cost conditions. The change in price cannot be conducted without inducing a subsequent change in quality. Equilibrium price is determined by the cost conditions of entry where no quality competition occurs. The condition of survival for a existing firm under entry deregulation is discussed. Deregulation eliminates some uncertainty inherent in the market but fails to yields certainty. For the case of the airline industry, this dissertation shows that deregulation results in a lower price, a higher load factor, a higher quality, and a lower profit per unit of quality than those under regulation...