Over-investment in a monopoly situation : the case of Malta's national airline

Abstract

This dissertation tests the hypothesis that if a firm is operating outside a perfectly competitive market, its discretion in setting objectives that are different from that of profit maximisation are likely to result in an over investment in its supply capabilities. A case study Is constructed around Malta's national airline (which has a dominant status in its market, but is now operating in a deregulated environment) to analyse the hypothesis. The airline's objectives - as set by its majority shareholder, the state - are determined and explained and a test for overinvestment is conducted by studying the trend of aircraft productivity per hour flown (since aircraft are an airline's main form of capital). The findings suggest that the productivity of the airline's aircraft has declined. The conclusion reached is that Air Malta's capacity is indeed above its optimal level. This means that the current situation is leading to a Pareto sub-optimal allocation of the economy's resources since excess resources are being employed by Air Malta. Moreover, this over-investment causes a distortion in the market and further reduces competition.