Austrians and Core Theory

[whitespiral]

Hello everyone!

I’m new here so let me just say how pleased I was with the simple, 5-line signup proccess for these forums. Good to see Austrian principles put into practice!

My area is aviation and air transport, and as some of you may know, the most burning problems facing the industry are frequently seen and explained under core theory. I am still a novice with the idea, but I am completely clueless about is how Austrian economists treat core theory. I tried searching here and elsewhere but didn’t find it being mentioned anywhere.

So, any takers?

Thanks in advance!

WS

[Anonymous_Coward]

I found a paper:

Competition in the airline industry has been fierce since the industry was deregulated in 1978. The proponents of deregulation believed that more competition would improve efficiency and reduce prices and bring overall benefits to the consumer. In this paper, a case is made based on core theory that under certain demand and cost conditions more competition can actually lead to harmful consequences for industries like the airline industry, or cause an empty core problem. Practices like monopolies, cartels, price discrimination, which are considered inefficient allocation of resources in many other industries, can actually be beneficial in the case of the airline industry in bringing about an efficient equilibrium.

And:

Specifically, core theory suggests that, under certain conditions, non-competitive practices may in fact have an efficiency-enhancing role in the sense of making both producers and consumers better off. Core theory also clarifies the notion of efficient competition and cooperation–that agents in a market may simultaneously cooperate and compete at the same time.

And:

Empty core: Situation where there is no stable equilibrium. In some industries, competition leads to an empty core problem.

Sounds like a revisitation of the socialist calculation debate…

[Inquisitor]

When we are speaking of competition, what are we referring to? Austrians maintain that the ideal market structure for varying industries will differ - i.e. that there is no one-size-fits-all. Isn’t this relevant here?

[Anonymous_Coward]

@Inquisitor

When we are speaking of competition, what are we referring to? Austrians maintain that the ideal market structure for varying industries will differ - i.e. that there is no one-size-fits-all. Isn’t this relevant here?

The paper has an interesting view on competition, non-Austrian at least;

It is also argued that, if price discrimination was banned and airlines were forced to offer the same price, many airlines might suffer losses and some might even stop flying. If this is true, this may have a contrary effect of making consumers, who could have paid higher prices, worse off. This is another example of how noncompetitive practices like price discrimination can lead to an efficient equilibrium.

If I’m reading that correctly market pricing (price discrimination) is noncompetetive even though they admit governmental price-fixing would result in losses and actually decrease competition.

Don’t know if that answers your question but they don’t seem to have any idea themselves.

[Inquisitor]

I do not know what to say. It seems to me that the article’s author is confused. If by competition he means a perfectly competitive market, then yes, it is probably correct that a more ‘imperfect’ market structure would be more efficient. Familiarity with Austrian theory would help.

[whitespiral]

One of the main conditions these guys cite as necessary in order to end up with an empty core, is big divisibility of demand coupled with low divisibility of supply, and large avoidable costs.

In the airline industry, that means, you supply, say 200 aircraft seats for a flight, but no matter how many you end up selling, you’re still flying all 200 of them.

I assume that the reason for this being a necessary condition, is that in a competitive environment, you almost always end up with oversupply since the minute you find a profitability island (say profitable route), someone will attack it, making your efforts to fine-tune your operations to fly above the break-even load factor moot. This then further magnifies the divisibility/non-divisibility issue.

But this is me just speculating and I could well be wrong. I don’t think core theory proponents support socialist actions to solve empty-core problems. I think they advocate more free competition, and possibly some relaxation of anti-trust/competition regulations in order for vertical and horizontal alliances to develop.

[Inquisitor]

Well if I am correct and they are attacking perfect competition theories, then yes, you are most likely correct. It is a matter for the market to ‘decide’ which is the ideal structure in a given industry. Perfect competition is an attempt at a one-size-fits-all approach.