Price Cap Deregulation and Competitive Entry: Evidence from China's Airline Markets

Abstract

Price caps are widely adopted to restrain the abuse of monopoly power, but their impact on firm entry is underexplored. This paper investigates the effect of price cap removal on competitive entry based on the practice of China's airfare cap deregulation. Evidence suggests that the elimination of price caps significantly increases the number of airlines at the flight route level, as it leads to a larger number of new entrants. We further summarize the patterns of airline entry, and find that the deregulation encourages the entry of both state-owned and private airlines, and helps to improve service availability in remote areas. Moreover, the effect on competitive entry is less significant when facing competition from high speed rails. These results imply that price cap deregulation does not necessarily increase the market power of incumbents.

Keywords: Price cap, Competitive entry, Airline deregulation