Ineffective Service Sector Liberalization: The Case of European Air Transport

Abstract

This paper seeks to identify obstacles to competitive markets in formally liberalized service and network industries of fifteen European Union Member States. It is argued that loopholes in EU competition and state aid rules allow national governments to further subsidize previously monopolistic providers, which simultaneously benefit from market entry barriers through network capacity constraints for potential competitors. A case study of the European passenger air transport sector illustrates the competition distorting measures and discloses their negative impact on liberalization efforts. The results imply that the liberalization success of national European air transport markets varied substantially due to state aid and market entry barriers, which are partly rooted in supranational de- and re-regulative design.

Keywords: liberalization, subsidies, compliance, special interests, air transportation, network industries

JEL Classification: D43, L93