This thesis argues that formal liberalization of service sectors is only a necessary but not a sufficient condition for increased competition. Service providers demand and governments supply providers with a certain level of protection, particularly in the form of financial state aid. On the basis of rent seeking and collective action considerations I argue that the level of protection partly depends upon the political power of established providers who defend their dominant position against potential rivals. These considerations are directly applied to the air transport sector of the European Union and empirically tested by means of ordered logit regression models. The results support the theoretical expectation that protectionism and hence the gap between liberalization and competition prevails particularly in markets where governments and airlines are closely connected in terms of equity stakes and personnel.
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