Ioannis N. Kessides

Localized Market Power in the U.S. Airline Industry

This paper tests whether the observed dominance of most city-pair markets and airports in the U.S. domestic airline industry by single carriers confers any pricing power on the dominan t firms. The results of fixed-effects estimation indicate that airport dominance by a carrier does confer upon it substantial pricing power , whereas dominance at the route level seems to confer no such pricing power. Additionally, the authors find a positive, yet small, correlation between both route concentration, and price and airport concentration and price. The quantitative importance of airport dominance reveals that the most promising direction for public polic y aimed at improving the industrys performance is to ensure equal acc ess to sunk airport facilities. Copyright 1993 by MIT Press.

Advertising, Sunk Costs, and Barriers to Entry

This paper tests hypotheses about the entry-deterring effects of advertising. The model isolates three separate effects of advertising on entry: the effect on the irrecoverable costs of entry, the effect on the uncertainty underlying the entry environment, and the effect on the measured rates of profit. We find that advertising impedes entry since necessary advertising expenditures give rise to a sunk cost which raises the risk of entry. However, we also find a countervailing force due to advertising, in that the entrant perceives a greater likelihood of success in markets where advertising is important. Our analysis shows that the overall impact of advertising on entry is positive.

Market Concentration, Contestability, and Sunk Costs

This paper provides an exploratory assessment of the theory of contestability that is based on a diverse sample of industries and introduces a new important determinant of market concentration. The results of the paper indicate that the variables determining the degree of contestability of markets are significant correlates of market concentration. Sunk costs account for a substantial portion of the sample variance of concentration even after technological factors are controlled for. Copyright 1990 by MIT Press.

Current and Forthcoming Issues in the South African Electricity Sector

Paper delivered at the ABCDE conference, held in Cape Town, South Africa, June 9-11, 2008. - The primary objective of this report is to examine the structure of the South African electricity supply industry and to analyse public policies designed to improve its performance. It is a comprehensive document which divides into seven main sections: I. Introduction and preliminary observations. II. The structure of the electricity industry in South Africa. - III. The performance of the electricity industry. - IV. Regional integration in Southern Africa. - V. International policy developments. - VI. Recent electricity reforms in South Africa. - VII. An agenda for policy action and cooperation.

Regionalizing infrastructure for deepening market integration: the case of East Africa

The East African Community has long recognised that regional economic integration can yield significant welfare gains to its member states. To that end, the community has been making steady progress towards the removal of tariffs and quantitative restrictions to trade. Moreover, in recent years, there has been an increasing recognition that (a) even greater welfare gains could be realised through deeper forms of regional integration which entail harmonisation of legal, regulatory and institutional frameworks; and (b) reforms that reduce cross-border transaction costs and improve the performance of ‘backbone’ infrastructure services are arguably even more important for the creation of an open, unified regional economic space than trade policy reforms narrowly defined. Disparities of regulatory treatment across borders can introduce distortions that hinder both cross-border trade and the aggregate flows of investment on a regional basis. Regulatory harmonisation and infrastructure regionalisation could make a significant contribution to the region’s economic development by promoting a more efficient utilisation of its human and physical resources, enhancing connectivity, reducing the costs of trade and facilitating the integration of the continent with the global economy.

Pricing Dynamics of Network Utilities in Developing Countries

This paper examines the pricing of a utility with an underdeveloped network facing a competitive fringe, short-run network adjustment costs, theft of service, and the threat of retaliatory government intervention that is increasing with the price it charges. Under a variety of plausible assumptions (in the context of developing countries) the utility will find its long-run profits enhanced if it exercises pricing restraint in the early stages of network development. These findings provide some useful insights for the design of post-privatization regulatory governance in developing countries where years of price controls have contributed to choking off investment in network expansion.

Toward Defining and Measuring the Affordability of Public Utility Services

This paper reviews the progress made in the literature toward defining and measuring the affordability of utilities. It highlights the relative merits of alternate affordability metrics; the practical challenges to their operationalization, including the underlying data requirements; and their implications for the design, evaluation, and implementation of appropriate affordability programs.

The Pricing Dynamics of Utilities With Underdeveloped Networks

This paper uses an analytically tractable intertemporal framework for analyzing the dynamic pricing of a utility with an underdeveloped network (a typical case in most developing countries) facing a competitive fringe, short-run network adjustment costs, theft of service, and the threat of a retaliatory regulatory review that is increasing with the price it charges. This simple dynamic optimization model yields a number of powerful policy insights and conclusions. Under a variety of plausible assumptions (in the context of developing countries) the utility will find its long-run profits enhanced if it exercises restraint in the early stages of network development by holding price below the limit defined by the unit costs of the fringe. The utilitys optimal price gradually converges toward the limit price as its network expands. Moreover, when the utility is threatened with retaliatory regulatory intervention, it will generally have incentives to restrain its pricing behavior. These findings have important implications for the design of post-privatization regulatory governance in developing countries.