Market Power

Musings by an academic economist on the power of markets and the power over markets.

Monday, November 08, 2004

Airline Deregulation

The St. Louis Post-Dispatch has this article on the deregulation of the airline industry in the United States.

While regulation is bad for the customer, especially in the long run, it’s been argued that some companies actually like regulation. By allowing themselves to be regulated, companies can use their position to keep competitors away and to maintain a profit. I suppose it is easier to justify why prices need to be set at some regulated level than it is to convince consumers that your product is their best choice. Here is a quote from the article:

“Regulation lasted four decades, starting in 1938. That’s when the government and the airlines struck a bargain. ”The airlines let the government tell them which cities they could serve, and how much they could charge for tickets. In return, the government set the ticket prices high enough to make sure the airlines made money. ”The bargain was a good deal for airline management. Without much sweat, management kept the books in the black.”

Here is another quote from the article describing who else benefited and which consumers got served:

“The bargain was also a good deal for airline unions. They won high paychecks and strong work rules. Management went along. After all, the government would cover the higher labor costs by raising ticket prices. ”Trouble is, the bargain shut out consumers. Nobody could shop around for a discount fare. The airlines might compete on the basis of which had the leggiest young flight attendants or the highest-octane cocktails. But they all charged the same fares. ”And those fares were high — so high that flying ferried only the coat-and-tie set. Business executives flew. The rest of us drove, rode the bus or took the train.”

Deregulation has forced firms to find ways to cut costs and pass savings onto consumers. The newer low-cost airlines are not free of unions, but they are relatively free of inflexible practices that one sees in older airlines. The low-cost airlines find ways to specialize and thereby lower their costs, passing on savings to consumers.

Just as one would expect, especially over time.