South-Western College Publishing - Economics  
Airlines Fixing Fares? Naahhhhh....
Topic Oligopoly
Subject British Airways and other airlines are under investigation for allegedly fixing passenger fares and fuel surcharges.
Key Words cartel, airlines, British Airways, price-fixing.
Full Article

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Reference ID: A147445905

News Story The U.K.'s Office of Fair Trading and the U.S. Justice Departments are jointly investigating British Airways, Virgin Atlantic, United Airlines and American Airlines for colluding in passenger fares and fuel surcharges. The investigation comes as British Airways stands accused of operating a cartel for cargo fares.

In this post-September 11 environment, the airlines are accused of coordinating passenger prices, fuel surcharges, and higher war risk insurance fees charged to passengers. The four airlines listed above are the only airlines allowed to fly between the U.S. and London's Heathrow Airport under current bilateral treaties. All four airlines indicate that they are cooperating with the investigations and are not guilty of any wrong-doing.

Analysts indicate that under the worst-case scenario, British Airways and others will be forced to forego up to 10% of turnover on routes between the U.S. and U.K. In other words, the antitrust agencies in both countries may require additional competition going into and out of Heathrow Airport in London. In fact, the two countries are already discussing ways to open up competition on trans-Atlantic flights. Such competition bodes particularly ill for British Airways, though, as it could mean a fine of up to 350 million pounds (U.S. $637 million).

Discussion Questions:
1. Why is cartel activity so difficult to maintain?
2. Suppose British Airways was, in fact, guilty of colluding with the other airlines, but then prior to this investigation it decided it was no longer going to cooperate with the other airlines. What would happen in this market? Why?
3. Given the difficulty in maintaining a cartel, is it incumbent upon the government to do something to break up cartels? Why or why not?
Multiple Choice/True False Questions:
1. A cartel is
  1. A group of firms that sell oil
  2. A group of firms that act competitively
  3. A group of firms that act monopolistically
  4. A and C
2. What incentives do the airlines have to cooperate with each other, as the article indicates?
  1. Profits are higher when they cooperate than when they compete.
  2. Profits are higher when they compete than when they cooperate.
  3. Additional firms are prevented from entering the market.
  4. A and C.
Source Smith, Michael. "US, UK Investigate Airlines Price Fixing." Reuters Press. June 22, 2006.
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