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Regulation and the Nature of the Firm: The Case of U.S. Regional Airlines

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Document pages: 22 pages

Abstract: In his pathbreaking article, Ronald H. Coase postulated that the structure of production was determined by the comparative advantage between contracting and hierarchy in securing and coordinating complementary resources (human or material) when the efforts of more than one person were required for production. While Coase considered the possibility that the regulatory context in which activity takes place might also influence the way it is structured, he considered the problem only very generally. This paper suggests that airline deregulation has profoundly affected the structure of firms that operate airline networks by affecting the contractual conditions under which airlines purchase labor inputs, by removing constraints on the extent and nature of the firm’s route network and by changing the competitive environment in which airline firms operate. Where a stable uniform firm structure existed under regulation, airline networks now are organized with a variety of firm structures and individual networks have changed as particular conditions have changed over time. No single structure dominates, although some are more common than others.

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