Airlines, Airports and Antitrust: A Proposed Strategy for Enhanced Competition

55 Pages Posted: 13 Oct 2011

See all articles by Paul Stephen Dempsey

Paul Stephen Dempsey

McGill University - Faculty of Law

Robert Hardaway

University of Denver Sturm College of Law

Date Written: October 12, 2011

Abstract

Prior to deregulation, the consensus among many economists was that removal of governmental barriers to entry and pricing for airlines would result in a healthy competitive environment, one perhaps approaching that of perfect competition. Destructive competition, whose purported existence gave birth to regulation of these two industries in the 1930s, was deemed unlikely to occur. It was predicted that concentration was highly unlikely, for new entry would keep the industry hotly competitive.

Transportation, however, has turned out not to be the ideal model of perfect competition that many proponents of deregulation insisted it was. There appear to be significant economies of scale, scope and density, and economic barriers to entry in the airline industry. Widespread bankruptcies and mergers have reduced the number of competitors to the point that major oligopolies now exist. Large airlines now dominate the infrastructure of airports, their gates and landing slots, as well as computer reservations systems.

The theory of contestable markets served as a major intellectual justification for deregulation. The theory posits that if a monopolist or oligopolist begins to earn supracompetitive profits, new competitive entry, or the threat thereof, will restore pricing competition. If incumbents raise rates above competitive levels, new entrants would be attracted like sharks to the smell of blood. The theory is premised upon the belief that economic barriers to entry and economies of scale in the airline industry are relatively modest. Even the threat of entry would be sufficient to discipline the market and restore the competitive equilibrium.

Contestability has not served as a significant competitive catalyst in the deregulated airline industry, and has since been abandoned by the Justice Department, which now regulates airline mergers. Because of formidable barriers to entry, many airlines are now able to exert market power in the markets which they dominate. With the creation of frequent flyer programs, travel agent commission overrides, and megacarrier dominance in fortress hubs and computer reservations systems, the entry of new carriers is highly unlikely today. In a situation where market power exists, prices rise and the level of service can deteriorate; excessive wealth is transferred from consumers to producers, and society's resources are misallocated. As consumers purchase alternative products or services it costs society more to produce.

Keywords: Air Transportation, Airlines, Airline Deregulation, Antitrust, Airline Competition, Pricing, Economies of Scale, Landing Slots, Airline Hubs, Computer Reservation Systems, Incumbents, New Entrants, Airline Market Power

Suggested Citation

Dempsey, Paul Stephen and Hardaway, Robert, Airlines, Airports and Antitrust: A Proposed Strategy for Enhanced Competition (October 12, 2011). Journal of Air Law and Commerce, Vol. 58, No. 2, 1992, Available at SSRN: https://ssrn.com/abstract=1942926

Paul Stephen Dempsey (Contact Author)

McGill University - Faculty of Law ( email )

3690 Peel Street
Montreal, Quebec H3AIW9
Canada

Robert Hardaway

University of Denver Sturm College of Law ( email )

2255 E. Evans Avenue
Denver, CO 80208
United States

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