It is good that Minnesota is among the 19 states plus the District of Columbia that are asserting their voices about the proposed merger of American Airlines and US Airways. This deal, just the latest in an ongoing series of mergers that have reduced competition in air travel, is bad for consumers, businesses and overall economic efficiency.
But the Obama administration, just as the four previous administrations, Republican and Democratic alike, has little interest in antitrust enforcement. Perhaps the state attorneys general will give the federal Departments of Justice and Transportation some needed resolve.
The lack of public interest in maintaining competition in air transportation is curious. Many households have some member fly in any given year. And nearly everyone pays the costs of business flying that get incorporated in the prices of myriad goods and services. But the lack of any appreciable public outcry about anti-competitive mergers, including the 2008 move between Delta and Northwest, makes it clear that people don’t see a problem.
Perhaps the Carter administration’s deregulation of airline routes and fares some 35 years ago sent erroneous messages that airlines don’t engage in monopolistic behavior or that such actions don’t harm society. Nothing could be further from the truth. There is always potential for waste of resources and abuse of buyers when only one or a handful of sellers offer some product. That should be as clear to people now as it was to Scottish economist Adam Smith 237 years go. The question is what to do about it.
The issue became acute in America after the Civil War, as railroads that enjoyed little competition exercised the monopoly power they had in serving specific towns, with abusively high rates charged for delivery of goods or passengers. There was public outcry, and it resulted in the detailed regulation of rates that ended only a century later under Carter.
It may surprise some that a Democratic president would spearhead the largest deregulation effort to date. But it was clear to Carter’s transportation guru, Cornell economist Alfred Kahn, that the rate-setting Civil Aeronautics Board he headed, together with the Interstate Commerce Commission that regulated surface transportation, by then served to inhibit competition rather than promote it. Better to deregulate rates and routes, Kahn argued, and let the increased competition brought about by modern transportation technology lower prices.
Many other economists thought Kahn was right on this specific issue, and most still do. But nearly all still see the net effects of uncontrolled monopoly power as bad.
Decades ago, Berkeley economist Joe Bain argued that the effects of monopoly could be evaluated by examining the “structure, conduct and performance” of companies.
“Structure” meant the number and size of firms in a specific industry. Did one or a handful of producers dominate regional or national markets?
“Conduct” was their pricing policies. Did they collude to fix prices? Did they divide up territories? Did they use predatory pricing to drive out new entrants?
“Performance” referred to their cost structure and profitability. Did they have high returns on sales or equity? Were they lethargic in management?
Transportation rate regulation attempted to control the “conduct” of railroads, shipping companies and, later, airlines. Its first application through the ICC predated the Sherman Antitrust Act that was the first effort to control “structure” by outlawing any “combination in restraint of trade.”
Kahn and other advocates of rate deregulation had become convinced that this variety of anti-monopoly policy, micromanaging conduct, had become counterproductive. But they never argued that the same applied to limiting structural concentration. Indeed, the benefits to the flying public and overall economic efficiency of rate deregulation would only materialize if the government maintained an aggressive antitrust stance to keep many sellers in the game.
That has not happened. The litany of airlines absorbed by others — Eastern, Western, Southern, North Central, Piedmont, Allegheny and even Northwest, goes on and on. More and more markets have fewer and fewer carriers. The active competition by multiple carriers envisioned by deregulators 40 years ago is proving ephemeral indeed. But active antitrust enforcement seems as lost a priority for the Obama administration as it was for the Bush, Clinton, Bush and Reagan administrations before it.
The carriers argue that flying is expensive and profitability has been terrible in the 21st century. Nearly all the majors, including American, have now been through bankruptcy. Economies of scale made possible by further consolidation are the only out, the carriers argue, and these economies will be passed along to the public in better service and lower ticket prices.
Don’t hold your breath. Ongoing analysis of the economic effects of airline mergers after 2000 show that the predominant effects were the classical outcomes of monopoly: poorer service and higher prices.
And a merger of American Airlines and US Airways will only accentuate that. The administration is drowsy, and Congress is asleep. Maybe the attorneys general will be able to wake them up. But don’t count on it.