Airlines of Prey Protected by Government Inaction
Subject Public choice
Topic Market Failure, Regulation, and Public Choice
Key Words Low-cost competitors, prices, markets, fares, service
News Story

Outgoing Secretary of Transportation Rodney Slater said that the Clinton Administration would not introduce guidelines to prevent big airlines from thwarting low-cost competitors by temporarily cutting prices and offering more flights until the competitor was forced out of the market, whereupon the major airline would raise fares and reduce service once more. Slater said that general guidelines would be inappropriate and that a case-by-case approach would be better.

This is in stark contrast to the 1998 Department of Transportation view which was that guidelines were needed. Since then, however, the major airlines have lobbied intensely against measures. Slater responds that regulations could stifle true competition: it could be that a smaller airline simply could not perform. The new administration will have three studies of past unfair practices to decide which way to go.

(Updated February 1, 2001)

1. Do you think that the public interest or capture theories of regulation explain the lack of action by the Clinton Administration over predatory pricing? Why?
2. Suppose the government was correct in its view that regulation was unnecessary.
a) What was the government assuming about the competitiveness of the market for air travel? Explain.
b) Why might lobbyists have exhibited a low demand for regulation of predatory pricing?
c) Why might politicians have decided to supply only a small amount of regulation?
3. Suppose the sequence of events is consistent with capture theory.
a) Why might major airlines be able to oppose any attempt at regulation?
b) Why might politicians be willing to acquiesce?
Source David Field, "No guidelines to limit major airlines' response to low-fare rivals," USA Today, January 17, 2001.

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