Well, isn’t this lovely: airline fares are higher this week than last
week because major airlines have stopped matching the discount fares of
smaller airlines. The boon that rigorous price competition has meant for
travelers for the last several years has come to an end. There’ll be no more
consumer-driven ploys to force large carriers to lower their rates by citing
rock-bottom prices found elsewhere. No, the price is now sky-high and fixed
for the duration.
Don’t blame the air carriers. The culprit is the Justice Department,
which has filed a wrongheaded suit against American Airlines for its pricing
practices at Dallas-Ft. Worth Airport, which are supposedly “predatory.” It
seems a small company named Vanguard didn’t enjoy going toe-to-toe with the
big boys, and persuaded the government to clobber its larger rival with the
now-fashionable antitrust club.
It doesn’t help that this regulation-driven price freeze comes on top of
news that general price increases are starting to haunt the macroeconomy.
But leave it to the Clinton administration to do the wrong thing at the
wrong time, and produce the opposite results of its stated intentions.
For example, the brainy boys at the antitrust division assaulted
Microsoft just when web commerce was becoming truly viable, and we’ll never
know how much this attack set back progress. Now, the same geniuses are
slamming large air carriers just when consumers were gaining the power to
pick and choose fares and carriers at will.
What American Airlines was doing — against its will — was matching
ticket prices of smaller carriers (which offer less service), even though it
meant accepting lower profits and even losses. Such is the nature of today’s
competitive marketplace. The consumer is in charge of determining what
company does the best job at the best price. This is especially true now
that fares can be compared instantaneously by anyone through web travel
services. American Airlines was doing nothing but trying to keep its head
After the regulatory assault, the trouble for the airline industry is
this. The antitrust suit seems to imply that it is illegal to lower prices
too much too often, even if that is what competitive conditions require,
because doing so might diminish the profitability of smaller competitors.
But how much is too low and how fast is too fast? The Justice Department
will not and cannot say. Fearing lawsuits and arbitrary legal action, air
carriers have decided to play it safe and just keep their prices high.
The victim is the traveling consumer, whose interests were absurdly cited
by the Justice Department when it filed its lawsuit. Who are these
bureaucrats trying to kid? Fare wars are the best thing to happen to the
average fellow. Now these average fellows are stuck with higher prices
because smaller carriers like Southwest Airlines, Frontier, and Vanguard fly
less than 15
percent of the air traffic.
It also means more inconveniences, since small carriers have fewer
scheduling options. To get lower fares, consumers will have to take indirect
flights, endure tedious layovers, and forego frequent-flyer miles offered by
big carriers. Moreover, if the smaller carriers can depend on not facing
rigorous competition from the big players in the industry, they too are
suddenly free to raise their prices like never before. No more struggles to
get a foothold in the marketplace; the government carves a niche for you and
makes sure you keep it.
Ironically, it seems like only yesterday that the federal government was
demonizing small carriers, and even grounding their planes, because they
were supposedly less safe than the larger carriers. Despite the absence of
any evidence supporting this contention, small players suddenly faced huge
new costs associated with crazy government inspections. Now, in an instant,
the government’s guns are pointed the other way, demonizing the big players
on grounds that they are too anxious to give consumers a good deal.
But what about the claims that American was using “predatory” techniques?
The fantasy is this: the big guy lowers prices to undercut the competition
and then comes roaring back with high prices once he has the market
monopolized. This is a nice fantasy and it might make a nice board game, but
it has nothing to do with the real world.
As Dominick Armentano argues in his new book,
Antitrust: The Case for
Repeal, there is no clear standard of what distinguishes predatory price
cuts from run-of-the-mill price cuts. It’s not as simple as looking at
prices as compared with costs, because costs convey historical data that may
or may not have anything to do with present market conditions. Moreover,
many accounting measures of cost: marginal cost, total cost, average cost,
long-run and short-run cost. The Justice Department arbitrarily selects one
just to make its case.
Moreover, a firm that endures losses to compete will eventually have to
recoup those losses through higher prices, but the new profits only serve as
signals for competitors to return to the marketplace. The game begins all
over again. This is not a good long-run business strategy, which is why
there are so few unambiguous examples of it in the real world. (I leave
aside the continually rising taxes the monopoly federal government has
charged its hapless “consumers” since putting its competition — the states,
under the original compact — out of business in 1861-65.)
There’s the additional problem that no regulator can know in advance
precisely how many competitors there should be in a market. Must there be
one thousand air carriers or do we need only one? Only the continual
trial-and-error process of market competition can tell us with certainty,
while interrupting the process only introduces distortions.
The truth is that the old-hat theories of predatory pricing have been
debunked ten thousand times in the serious economic literature. That the
Clinton administration is now resorting to them in its attack on major
airlines reflects intellectual bankruptcy and policy backwardness. The best
strategy for dealing with these periodic assaults on business by the
antitrust junta controlling the Justice Department is to rip away their
power by repealing restrictions on free enterprise once and for all.