The Welfare Effects of Use-or-Lose Provisions in Markets with Dominant Firms

A use-or-lose provision requires that firms employ a certain minimum fraction of their productive capacity. Variants have been used by regulators in the airline and wireless communications industries, among others. A typical stated objective is to limit capacity hoarding, thereby increasing aggregate output and welfare. When the dominant firm is more efficient than fringe firms, we find that imposing a use-or-lose provision induces the dominant firm to acquire capacity from the fringe, which causes aggregate output to fall. When the dominant firm is less efficient than the fringe, aggregate output rises. In both cases, total surplus may rise or fall. (JEL D43, K21, L13, L93)