Fall 2012

Gale and O’Brien sing the blues over Use-or-Lose!

Singing the blues

Crowded airports are an unfortunate fact of life. As the demand for air travel grows, regulators must deal with increasingly stringent limits on airport capacity. Many U.S. and European airports use takeoff-and-landing slots to determine which airlines fly at peak times. One concern is that airlines may hoard slots solely in order to reduce competition. In hopes of mitigating this inefficiency, regulators have imposed so-called “use-or-lose” provisions. These provisions require that the airlines utilize a certain minimum percentage of their slots on a monthly or annual basis. (Water rights, mineral leases, and fishing quotas have also been subject to use-or-lose provisions.) GCER Fellow Ian Gale and co-author Dan O´Brien from the Federal Trade Commission have examined the impact of use-or-lose provisions on social welfare.

In a recent paper, “The Welfare Effects of Use-or-Lose Provisions in Markets with Dominant Firms” (forthcoming in the American Economic Journal: Microeconomics), Gale and O´Brien find that use-or-lose provisions may be ineffectual or worse. While the provisions are imposed with the aim of inducing firms to divest themselves of unused capacity, the provisions may actually induce those firms to acquire capacity from competitors. A consequence is that aggregate output and social welfare may both fall. Gale and O´Brien conclude that the welfare effects of use-or-lose provisions are ambiguous overall, and they depend on the particular market in ways that make policy prescriptions difficult.