Structure, Conduct, and Performance in the Deregulated Airline Industry

Abstract

Unlike other disciplines, empirical studies in economics suffer from the characteristic that many results cannot be replicated through experimentation. Therefore, when unique natural experiments occur in economic settings, large numbers of applied economists are apt to analyze the data. The natural experiment generated by the passage of the Airline Deregulation Act in 1978 not only transformed the domestic airline industry, but also produced a cottage industry for economists as well. In the past dozen years, there have literally been hundreds of articles, books, reports, and editorials written about the airline industry. In most of these writings, the authors tend to agree that the benefits of deregulation have outweighed the costs.' Indeed, many of the favorable outcomes of deregulation predicted by observers of the airline industry have in fact been realized. Deregulation has enabled airlines to reduce operating costs, increase load factors, increase the availability of discount tickets, and increase the number of flights, all without a serious decline in service to small communities or safety. Although the designers of deregulation and economists in general appear to have predicted accurately the direction of welfare change, they did not predict accurately the present structure of the airline industry. Many of the fundamental attributes that now characterize the domestic airline industry, such as the hub-and-spoke method of delivery, complex pricing schemes, the dominance of many airports by single carriers, the importance of computer reservation systems, and the growth of loyalty-inducing devices such as frequent-flyer programs and travel agent commission overrides, did not exist in the regulated airline industry and were not predicted to emerge by proponents or opponents of deregulation. The failure of sophisticated observers to predict these developments demonstrates just how far out of line regulation had taken the industry.