Who Has Benefited from Regulation of the Airline Industry?

Abstract

THE notion that government regulation of a market or industry always serves the public interest has been questioned in the recent literature. George Stigler, in his pathbreaking article,' proposed that regulation is undertaken in response to demand by special interest groups and that it will serve the interests of the most powerful of these groups. He specifically suggests that an industry may seek regulation for its own benefit. The gains from regulation to the industry are derived from government's power to coerce and include direct money subsidies, control of entry, control of production of complements and substitutes, and control of market price. Sam Peltzman generalized this regulatory model,2 viewing the regulator as a political support maximizer, to examine how the benefits from regulation are divided among the competing groups. Two important extensions of the model were that: (i) in general, some benefits of regulation will go to all interest groups involved, even though one group may dominate in the gain; and (ii) as conditions in the market change over time, the distribution of gains may change with them. This paper examines the recent policies of the Civil Aeronautics Board (CAB) in their regulation of the airline industry in an attempt to determine who has benefited from it. Several earlier studies investigated the distribution of benefits from CAB regulation. William Jordan, from his study of the regulated and nonregulated airline fare structure in California in 1965,3 concluded that regulation resulted in excess capacity, thereby benefiting aircraft manufacturers, airline employees, and suppliers of airline services. He argued that industry profits were not being maximized due to imperfect cartel management by the CAB, and therefore that airlifle firms