South-Western College Publishing - Economics  
Brother, can you spare a cheap fare anywhere in the US?
Subject Protectionist legislation has ended up hurting airline competition, keeping airfares high.
Topic Government and the Economy; Market Failure, Regulation and Public Choice; Utility and Consumer Choice, Oligopoly; International Trade
Key Words

Wright Amendment, American Airlines, Southwest Airlines, protection

News Story

Southwest Airlines can fly anywhere it wants, as long as it's not from Dallas, its home airbase. Or so says the Wright Amendment.

Originally written in Texas in 1979, the Wright Amendment limits flights of full-size planes from Love Field, Southwest's home base not far from Dallas. The amendment allows full-size Southwest Airlines planes to fly only to adjacent states. Anyone wanting to fly longer distances would have to fly out of Dallas-Fort Worth International Airport, constructed in 1979. The law was designed to protect an "infant-industry," so that the Dallas-Fort Worth Airport would have an opportunity to become profitable before it engaged in significant competition with other airfields.

In the twenty-five years since the amendment was passed, Southwest Airlines has grown to be one of the most competitive and profitable airlines, and American Airlines, whose main hub is in Dallas-Fort Worth, has struggled, and maintains much higher fares based out of the Dallas-Ft.Worth hub than Southwest fares from out of Love Field. Southwest has recently switched from its "passionately neutral" stance on the amendment and argued that American has wrongly benefited, and consumers have been hurt from the Wright Amendment. Southwest and many others airlines have begun lobbying for its repeal. Not surprisingly, American Airlines and Dallas-Fort Worth Airport have lobbied for the amendment's provisions to continue.

Economic theory would argue that if the amendment were repealed, then consumers would benefit from having greater choice, as well as from more competitive prices. Someone in Dallas needing to go to Chicago, for example, would have the ability to find a direct flight from Southwest in addition to the one from American Airlines. Further, the presence of greater choice would have the effect of lowering prices, as airlines began competing for airline customers.

Questions
1.

What is the rationale behind limiting competition through the "infant-industry" argument?

2. Suppose this amendment is repealed. What will be the impact on an individual's budget constraint? Draw a budget line with price of airline flights from Dallas on the horizontal axis, and all other goods on the vertical axis.
3. If this law is repealed, what will be the effect on American Airlines, both in terms of demand for its product, as well as its average costs? Why will these change this way?
Source Virginia Postrel. "Hurdle faced by Southwest Airlines shows drawbacks of protectionist legislation." The New York Times.. 2 December 2004.

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