NCPA - National Center for Policy Analysis

Trust-Busters Eyeing Airlines

May 21, 1998

Airline fares have fallen an average of about 40 percent in inflation-adjusted terms since the domestic industry was deregulated in 1978. Rather than being cheered by that news, the federal government is now searching for signs of what antitrust lawyers call "predatory pricing" -- which supposedly involves a carrier's lowering its fares to drive a competitor out of business.

While some lawyers see the concept as valid, few economists take the theory seriously. Since when, they ask, is lowering prices to meet competition unlawful?

  • Economists say that to make predatory pricing work, the predator has to sacrifice profits for as long as it takes to eliminate the competition and then be able to raise prices sufficiently to recover its losses without attracting new competition -- a nearly impossible act of high-wire economics.
  • Nevertheless, the Department of Transportation has outlined "patterns of behavior" that it will view as evidence of predatory pricing.
  • Experts say that airline fares increase for one of three reasons -- if routes are thinly traveled, if flights go to "fortress hub" airports dominated by one carrier, or if the fares are of the unrestricted variety which few people pay.
  • Airline industry specialists report that established carriers are only now beginning to make money after decades of struggle and consolidation.

Experts worry that antitrust action directed against air carriers would lead them to drop service on low-traffic routes and cut into the shuttle-like frequency of high-density business routes.

Source: Peter Passell, "The Airline Industry Is Lurking on a Second Antitrust Front," New York Times, May 21, 1998.


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