Regulation Policy

"Predatory Pricing" Simply Won't Fly

Economists agree that predatory pricing -- the practice of driving out competition by lowering prices and then reinstating high prices once the competitor is vanquished -- rarely, if ever, works. But the U.S. Department of Transportation apparently believes the theory.

Sensing that airlines are competing too much and fares are too low, it has issued new guidelines limiting airlines' ability to offer below-cost fares or employ other "predatory" practices.

Antitrust specialists say there have been few, if any, cases of successful predatory pricing -- for several reasons.

  • After lowering its prices sufficiently to make a competitor lose money and leave the market, a predator firm would have to make enough to compensate for the revenue it lost during the fight -- plus interest.

  • Moreover, another company could always enter the market to challenge the weakened predator firm while it was still trying to recover its losses.

Rules against below-cost pricing invite firms to compete in courts, rather than in the marketplace.

  • After American Airlines simplified its fare structure and lowered prices in 1992, rivals Northwest and Continental sued -- claiming an illegal predatory pricing scheme.

  • At the height of the fare wars, consumers reaped a bonanza and planes were filled with passengers throughout the summer -- even as airline revenues dropped by some $1 billion.

  • Since the case, claims of predatory behavior in the airline industry have increased dramatically -- ValuJet against Delta, Frontier against United, Reno Air against Northwest, and others.

Recently, airlines have been lodging complaints with the U.S. Transportation Department -- which is claiming the power to prevent unfair competition, even though its authority is unclear at best, according to legal experts.

Source: James L. Gattuso (Competitive Enterprise Institute), "Don't Outlaw Cheap Airfares," Wall Street Journal, April 8, 1998.

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