The new world of monopoly? What about flying?

I frequently see airlines cited as an example where the American economy is obviously more monopolistic.  By some metrics, yes, but what about the final deal?:

For more than three years, the average one-way fare between Detroit and Philadelphia never dipped below $308, and sometimes moved higher, topping $385 at one point.

But then, early in 2016, fares suddenly started to fall, according to data from the Bureau of Transportation Statistics. By the end of the year, the average one-way ticket between the two cities stood at just $183.

What changed? The primary factor was Spirit Airlines [a budget carrier].

…Even as a wave of mergers has cut the number of major carriers to four and significantly reduced competition, lower-cost airlines continue to play a role in moderating ticket costs.

…The cost of a round-trip domestic ticket averaged more than $490 in the first half of the year, up slightly compared with 2016, according to Airlines Reporting Corporation, a company that settles flight transactions between a number of carriers and booking services like Expedia.

The jostling, however, has left airline investors skittish. As the publicly traded airlines in July reported earnings for the second quarter, shareholders sold off their shares, worried about the fight over fares and capacity increases.

That is from Micah Maidenberg at the NYT.  In other words, the market still has a fair amount of contestability.

Or consider some more aggregated data.  As for output restrictions, here is the DOT series on aggregate miles flown.  No doubt, there are problems around the time of 9/11 and also the Great Recession, with 2008-2012 being a period of slight quantity contraction.  But in 1985 there were 275,864 [million] total miles flown, in 2006 it was 588,471, and 641, 905 in 2015.  I’ll ask again: if there is so much extra monopoly, where are the output restrictions?

Or look at the price index.  Overall prices are down considerably since 2008, and from about 2000 to 2016 they run from about 250 (eyeballing) to about 270, noting 1998-2010 saw a huge run-up in oil prices.  Since 2005, the U.S. went from having nine major airlines to four.

Maybe you’re upset about quality, but baggage lost each year — one of the easier quality variables to measure — is going down steadily.

Is this perfect competition?  No, of course not.  Is this ideal performance?  No.  Will looking at concentration ratios help you understand the industry very well?  Even more no.  And this is one of the worst cases of changing concentration ratios I can find.  Tomorrow, shall we do booksellers?  Or do I not even need to bother?


Now we just need low-cost, budget government.

+1 yes! Indeed state and local US government employees have expanded radically for the last two generations (by contrast Federal govt employees have not gone up as much since 1960, through their powers via laws have expanded)

As for TC's point: "I’ll ask again: if there is so much extra monopoly, where are the output restrictions?" - Population since 1985 is up only 37%, not the doubling and tripling of airline miles, so, if we posit airlines are a sort-of monopoly (which I am not against btw, you need the promise of sort-of monopolies to attract investment), then the reason output is up is that it's become cheaper for these sort-of monopolists to build planes. Anything built over time gets cheaper (whether by independent vendors or a handful of monopolists), this is an iron law of factories.

Quality? Sorry, way down. Less legspace, fewer Buddhists and Jews and more iconoclasts . . .

and the wonderful modern travel experience with TSA bullies, gropers, and thieves

The post allows for a number of counter arguments:
1. Till the introduction of Spirit Airlines on the route it seems to act as a monopoly. If you want to travel on a route without a low cost airline, you are essentially dealing with a monopoly.
2 Why look at aggregate miles? Wouldn't the aggregate miles/some_function(total population, avg wealth) be a better metric?
3. Why is lost luggage the best metric? Can't we look at Twitter sentiment or FHA complaints? It seems a metric that best supports the argument is being chosen...

"It seems a metric that best supports the argument is being chosen…"

Mood affiliation.

Its TC's job to defend oligopolies.

Ha ha, hilarious! There is a book that mentions Koch Brothers and oligopoly on the same page one time. Case closed!

Richard Posner:

“You’re not going to have people competing with the Koch Brothers. They have too much money. They own a great many Republican officials,” replied Posner"

Politicians don't have tenure.

1) A quick search shows that two other airlines offer direct flights, and two more offer reasonable connecting options less than four hours. Presumably this was the case before Spirit entered the market. I'm not sure why this is an "essential monopoly". The fact that the price was higher doesn't prove there was no competition previously.

2) The 113% increase in miles dwarfs the change in population (34%) and median income (15%) over the same time period. This would not change the story.

3) Twitter sentiment and complaints would be measuring a small, non-representative portion of the customer base, and also there are major issues of data comparability over time (e.g. if there is increased customer awareness of a complaint procedure, or a new easier to use web form for filing complaints is launched, then complaints will go up apart from any change in airline quality; Twitter's use and user base are constantly evolving). I think these would be next to useless as measures of quality change over time. By contrast, lost luggage is something that can be directly objectively measured (and ease of measurement is Tyler's explicit reason given for using it).

"Can’t we look at Twitter sentiment..."

Complaining on social media is free. Let's put a microtax on customer service complaint tweets and see how many go away as soon as people are paying 10 cents per. I'm sure if we had Twitter in the 70's people would be complaining about all the spilled martinis in their laps during bad turbulence

One question would be whether companies have gotten better at signaling to competitors so they don't have to meet in hotel rooms to coordinate. I can recall an older colleague telling me in 1985 how in the 1970s the FTC or Justice Department had subpoenaed his day-planner to check to see if he'd been in the same town as a competitor on a certain day. I don't hear much about kind of thing anymore.

Surprised nobody has mentioned this famous phone call...

Some collusion attempts become famous. In 1982, Robert Crandall, CEO of American Airlines, phoned Howard Putnam, CEO of Braniff Airlines. Mr. Putnam was taping the call and gave the tape to The Wall Street Journal:

Crandall: I think it's dumb as hell, for Christ's sake, all right, to sit here and pound the [expletive] out of each other and neither one of us is making a [expletive] dime.

Putnam: Well...

Crandall: I mean, you know, goddam, what the [expletive] is the point of it?

Putnam: Nobody asked American to serve Harlingen, nobody asked American to serve Kansas City, and there were low fares in there, you know, before. So...

Crandall: You better believe it, Howard. But you, you, you know, the complex is here�ain't gonna change a goddam thing, all right. We can, we can both live here, and there ain't no room for Delta. But there's, ah, no reason that I can see, all right, to put both companies out of business.

Putnam: But if you're going to overlay every route of American's on top of over, on top of every route that Braniff has�I can't just sit here and allow you to bury us without giving our best effort.

Crandall: Oh, sure, but Eastern and Delta do the same thing in Atlanta and have for years.

Putnam: Do you have a suggestion for me?

Crandall: Yes, I have a suggestion for you. Raise your goddam fares 20%. I'll raise mine the next morning.

Putnam: Robert, we...

Crandall: You'll make more money and I will too

Putnam: We can't talk about pricing.

Crandall: Oh [expletive], Howard. We can talk about any goddam thing we want to talk about.

The secret to making a million dollars in the airline business is to start with ten million.

@Steve C. - nice catch! on my bookshelf, I'm palming it now, is Thomas Petzinger Jr's "Hard Landing: The Epic Contest for Power and Profits That Plunged the Airlines into Chaos" (1995) that talks about Crandall among others.

Great find, Steve C.

Another question would be what was the impact of macroeconomic expectations switching from inflationary to deflationary. Perhaps in inflationary times, firms worry about being seen by government anti-trust busters as all raising their prices at about the same time. In contrast, in deflationary times, perhaps it's easier and less suspicious-looking for a loose cartel to simply not cut prices.

When I was taught the basics of anti-trust law, it was explained as that we couldn't charge more than our competitors, that would be gouging, we couldn't charge the same as that would be collusion, and we couldn't charge less as that would be dumping. Truth is that all these government anti-trust busters are mostly about incumbents protecting their monopolies thanks to their good connections, not really about increasing competition.

For example, I pay a lot of monthly fees, typically for electronic services (phone, internet, netflix, etc.) where the cost of a fixed level of service ought to be falling due to Moore's Law. However, I don't recall my monthly fees being cut very often. Instead, I get offered more bells and whistles for the same fee or higher price. Companies like these seem to be pretty adept at not cutting prices, despite massive deflation in their costs due to Moore's Law.

So, in 1973 the public was apt to complain to the government when firms raised prices simultaneously, while in 2017, the public is less likely to complain when firms keep prices fixed and even add some features, even if the behaviors are, in the final analysis, equivalent.

Moore's law refers to processing power. That is a trivial portion of the cost for all of the services you mention.

Also services like internet and Netflix are substantively changing over time: bandwidth is going up. This matters to quite a lot of customers, though perhaps not you personally.

There is also consumer behavior: people who are paying a certain amount tend to be willing to keep paying that, and companies are therefore unlikely to voluntarily lower prices. This is true even in highly competitive sectors. But if there is real competition and room to lower the price, you are likely to discover your prices magically go down as soon as you express a willingness to leave. I had my current provider's car insurance quote for the next year go down by about 50% once I told them I planned to switch to another company.

All that said, though, there are certainly genuine issues with lack of competition in internet and phone service in some parts of the U.S.

This is the same issue as wage stickiness, price stickiness is a well known issue in a low inflation environment, which is why many economists argue for higher inflation rates.

You are really not understanding Moore's Law here

That's a good question, why are cigarette prices going up? Is it because [Phillip] Morris makes cigarettes, not Moore?

How do airlines compete in the US? There are surprisingly little variables in which they can reduce costs versus their competitors. Unions largely control pay, and unions can and do coordinate across all companies (no anti-trust issues there). The cost of fuel is also set across companies as a commodity, as is the cost of the planes (there are really only two potential suppliers). Landing fees are set by the airport, again the same for all companies. Maintenance schedules are set by the FAA same for all type of planes and no skimping on parts. These must be the bulk of the costs? So what's left? Basically efficiency - working those planes harder, getting them as full as possible and cutting services, plus accepting lower profits. But there are limits to that as well. So costs of tickets don't vary much between companies. But that doesn't mean that the companies are not competing with each other, just that the areas they can compete are limited. It also explains why over booking is common and they are packing more and more seats into the same planes.

If you really wanted lower ticket prices may I suggest the US allows foreign airlines who don't pay union rates to enter the market. You might also consider expanding the number of airports in your area and privatising them - all but one U.S. commercial airport are owned and operated by public entities with no incentives to expand the market.

Efficiency is no small thing. Optimizing the routes and scheduling of an airline network is a classic hard computational problem, and there has been lots of room for innovation (and probably plenty more still to come). Think about it: airlines have to coordinate what routes they serve and the timings across the entire network to maximize the number of good itineraries that customers want, while also using the planes as much of the time as possible and making workable schedules for crews that return them to the right base, etc.

I don't think the cost of planes is really as set as you suggest. Despite limited suppliers of large planes, airlines still have a lot of choices to make in the type of fleet they operate, with varying capital, maintenance, and fuel costs. And within each plane type there are different options for seat configuration.

p.s. I agree on letting foreign carriers into the market and privatizing airports. Though I'm not sure there are many U.S. markets that lack airport capacity. The slotting system is hardly used in the U.S.

"If you really wanted lower ticket prices may I suggest the US allows foreign airlines who don’t pay union rates to enter the market. "

This. Milton Friedman made the point decades ago that very few monopolies can survive international competition. If you want to fight market concentration in airlines, just allow competition from foreign companies.

Reducing the rate of lost luggage isn't very valuable to people who avoid checking luggage since the airlines unbundled the service.

Dumb. Look at share prices. Churning and stagnant for decades, punctuated by bankruptcies, they've rocketed up since 2012 as the last mergers took effect (AA/USAir, Southwest/AirTran). I suppose Tyler thinks that's a good thing because it will bring lots of "innovation" like super-thin seats or having to pay money to use overhead space.

The story of low-cost airlines in the USA plays out the same way again and again: the major airlines crush them by taking losses on competitive routes, while making up for it on their direct-flight monopoly routes. The only low-cost carrier to survive was Southwest, which basically abandoned its low-cost policies and became a major with the same monopoly-oriented pricing strategy.

Government (politicians) controls route allocation, airport terminal slots, aircraft & crew/maintenance certification and most all other aspects of the airline industry.
Long term monopolies can only exist via government interventions..


There are parallels to the railroad industry over a century ago (boom and bust). Something about instability in transport/network markets perhaps. A really awful example for monopoly-mongers though.

Because I went directly from majoring in economics in college to getting an MBA in B school in 1980, I was struck by the sharp change in perspective on competition. Economics majors in college are told that competition is good, while corporate strategy students in management school are told that competition is bad.

Since the Dow Jones average is about two dozen times higher today than in 1980, I presume that a lot of MBAs have indeed figured out ways to lessen competition, just as they were instructed to do in their strategy courses.

Yeah, isnt this the whole point of Peter Thiel's last book?

To avoid giving credit to MBAs I'll go with the notion that IT particularly enabled lessening of competition.
(c.f. which does provide a nice tie to your stock market point)

The growth in the value of th stock market during the past 34 years was pretty similar to the growth in the previous 34 years.

The fact that you were a bit slow in coming upon what is a pretty banal observation doesn't bolster any argument you are making. No one on the production side has ever liked competition. Why on Earth would they?

I mean, a fundamental problem for any business is potential customers asking "Why should I do business with you rather than that other fellow?"

If you're only answer to that question is price, then you are in a commodity business, and in a commodity business, profits are squeezed out. That's hellacious competition. It seems to me that Wal-Mart is in such a business, and it's a bloodbath, and margins are razor thin, and consumers benefit yugely.

No business wants to be commoditized. So they need to articulate some reason beyond price. Some differentiator, a moat. This is 101 stuff.

To jump from this obvious reality to seeing monopolies all over (I mean, the airline business, so recently collectively bankrupted. Could Tyler chosen a more ridiculous example of monopoly profits?), is way dumber than your typical take.

Brian wins the thread.

You need to look at ticket prices inclusive of fees, not just fares. Those have continued the long run trend of falling in inflation-adjusted terms, although not every year.

Airline products across carriers have become less variable/more standardized. Price is only one element of competition. There are significant barriers to entry in the airline industry, not least of which is the prohibition on foreign ownership of US airlines. However that is hardly the only one.

The major reason Alaska Airlines purchased Virgin America was access to gates and in some cases slots at major congested airports. You not only have government-owned airports entering long-term leases with incumbent airlines, you frequently have capture of the bureaucrats running those airports by their major incumbent airline tenants. And where you have multiple airports in a metropolitan area, they're frequently jointly run by the same bureaucracy rather than competing.

Airlines are highly profitable, though not nearly as profitable as two years ago, the biggest delta has been fuel cost tied to the price of oil. Consolidation allowed airlines to capture much of the gains of lower fuel prices for a period of time, but the smaller number of carriers returned to expansion and competition on the basis of price competing away some of those savings-driven prices.

All that said the only monopoly air routes in the US are the ones no one wants to fly and that require government subsidies in order to entice carriers into the market. Which isn't to say that consumers wouldn't benefit from more competition than we have today.

Can someone explain why we can't get the super cheap fares you find in Europe? Like flying from Gatwick to Madrid for 30 pounds.

Allegiant air has some super cheap flights, but the routes are quite limited and not that frequent. But the other budget airlines still cost close to $200 to fly around most parts of the country.

Less union interference in the business, and airports willing to compete on landing prices, sometimes even to the extent of subsidising the plane companies to generate local business.

A few thoughts here. Let's start with booksellers: sure...Barnes and Noble and the other big chains ate everyone else, then Amazon ate them. Or so we're told, anyhow: my own experience is that I can find an arbitrarily large number of online vendors, most of whom clearly started--and may still be--brick-and-mortar establishments. I've bought used books from vendors in UK, France, and Australia. None of this would be possible without consolidators like AbeBooks and--yes!--Amazon.

As to the airlines: quality does play a role. In the same way that companies avoid dropping their prices by providing more for the same, the airlines have in many instances avoided raising their prices by providing less. I'm old enough to remember when checking bags was free, and when they charged you extra for an e-ticket: I expect that in another five years or so, I'll be writing that I'm old enough to remember when you weren't charged extra for using the head. Comparing sticker prices is meaningless once they start charging extra for doing stuff that used to be included in the sticker.

And let's talk about the quality of the experience. I'm also old enough to remember when airliner interiors weren't designed by the Armour Meat-Packing Company. Of course, there too, you can pay extra for seats that won't cut off your legs or even your circulation when you sit in them.

It would also be interesting to examine staffing trends in the industry. I'd bet good money that the number of "cabin attendants"--yeah, I'm old enough to remember stewards and stewardesses, too!--has declined considerably in the last fifty years.

One oddity about the stats from the Bureau of Transportation: the rate of increase in passenger-miles is much higher from 1960 to 1970 (108k to 31k, about 3.5X) than from either the period immediately prior to deregulation, 1970-1980 (108k to 191k, not even 2X) or the first post-deregulation decade, 1980-1990 (191k to 346k, about the same). So that would tend to make that metric a dubious one as a proxy for the impact of competition. And note that in this same 30-year timeframe, car passenger miles only about double (1,145k to 2,281k from 1960 to 1990).

I think it's clear that gross population increases aren't the measure: it's population increases above a certain income threshold that matter. It's of course anecdotal, but I've had plenty of conversations going back to the 1980s with people in my age cohort for whom the flight we were on was their first.

Besides the big airlines' effective ownership of specific airports (Atlanta-Delta), which consolidation was blessed by the DOJ, we have the specter of many mid-sized cities with almost no air service. Think Memphis and St Louis. I have a friend in the former who travels to China; try that for a nightmare life.

Even more-traveled cities with busier airports -- Nashville, Seattle -- have inconvenient service at best. (Last month, my most efficient route from Nashville to Seattle involved a hop through Houston (?) and then catching Amtrak in Portland for the final leg. I don't expect point-to-point travel in these cases, but still ....)

It's hard not to conclude that the underserved cities pay an economic price for their air travel isolation.

I just Googled this and there are three airlines offering direct Nashville-Seattle flights? My guess is that there were fewer options than that in the 90s, if any.

Memphis-China is not going to be direct but that's not a flaw in the competitive makeup of the airline industry, and there are three different options for one stop even if you limit yourself to using the same airline on both legs.

I do think overall the minor cities have been hit as airlines concentrate in their hubs (and on nonstop routes between major cities), Pittsburgh being a good case study.

Pittsburgh still has plenty of service for a mid-size city. But the airport is one of the largest in the country, built to be a major hub, and yes it has gotten quite empty.

Having flown from many mid-size U.S. cities, this comment doesn't match my experience at all. As for your two examples, Memphis Airport lists about 25 destinations with direct flights, and St. Louis lists over 60 (!). This is "almost no air service"?

Excellent post, but your data on miles flown are off by 6 orders of magnitude.

Someone ever so modestly modestly fixed the problem.

Thanks for ever so helpfully mentioning that.

1. Speaking about competition in the aggregate is misleading in the airline industry if you are not looking at competition in city pair markets.

2. Yes, Spirit and Frontier have an effect, but not enough of them and airplane slots are constrained at many airports so entry is limited.

3. If you look at rates alone and not other fees you are not making apples to apples comparisons.

4. International flights...that's another story which focuses on alliances. Good luck Norway Air.

5. Oil prices declined.

What about smaller markets where Spirit does not fly? $350-$450 for ticket, fees, taxes, bag charge, parking. Toyota, a large employer in Kentucky, recently moved their corporate headquarters to Texas. One reason, the "perceived weakness" of the Cincinnati, OH airport. Economic Darwinism at work.

I will acknowledge that prices have come down, but prices alone are insufficient. We must think bigger. Competition after all should be about innovation and choice too. Have airlines changed all that much since inception? Tighter tin can, periodic Wifi, movies, the best biscuits ever. Books, however, are a different story. Kindle, Nook, and hard copies. I have never had more options. Not to mention self publishing. Perhaps the airline industry should read more science fiction.

Suggests government should offer less incentives to get big firm investment and instead work on a better airport.

If it is not, how could they charge $ 385 for what they could do for $183.
Americans are being robbed by big business.

The airline industry is naturally oligopolistic. High barriers to entry.

Low cost fares exemplified are almost certainly loss leaders - unlikely to make profit. Don't be fooled by a low fare on one heavily traveled (high demand) leg. Small seat pitches (translation: leg room) and narrow seats are designed to maximize capacity, and therefore create additional profit factor which can then be redistributed - available either at profit or for demand-side benefit (lower cost, almost always TEMPORARY). One should also recall that the airlines have long done an excellent job at utilizing the demand curve as completely as possible (higher fares for 1st class, low fares for buying well in advance, etc). In spite of this, they do traditionally have narrow profit margins.

If the market were completely free, it is entirely possible that it would be naturally monopolistic. However, the air industry has, since its inception, been highly subject to regulation, perhaps because of its visibility. This regulation, to some degree, insures competition. Another factor that keeps corporate profits lower as an industry is likely the existence of strong unions. Even the low-cost, non-union carriers are impacted by the union wage scales, having, to some degree, to match them.

I fail to see how the airlines could be an example of where "the American economy is obviously more monopolistic". That seems like very poor logic to me, since the airlines are not a typical industry in any regard. Additionally, I see similar industry positions for airlines worldwide. I don't see obvious exceptions to the market pattern. By its very nature, I would think that the industry structure spans the globe - since the industry participants compete so closely.

Labor has always been a large cost factor for airlines as a business. I haven't been in the industry for some decades now, but I would bet that international carrier pilot wages are impacted by US and Euro wage rates. Probably lower in some instances, but much higher than they would be without the highly unionized labor in the US and Euro regions. Flight attendant wages should see the effect, but to a smaller degree, due largely to sex discrimination and the lower skill level intrinsic to the position. Ramp labor and other ground labor will see the greatest wage elasticity, due to a greater ability to shop the labor market for replacements.

Have you ever flown Spirit? You need to calculate the cost of the flight at the end of the trip, not at the initial purchase of the ticket.

True. If you have any bag larger than a purse you're going to pay $50 to carry it on. This means, pretty much everybody.

Companies getting away charging $ 385 for what they could sell for $ 183. Such is life in Trump's America.

Brazilian Bozo was way funnier:

Don't just look at aggregate monopoly for competition, look at marginal use of departure gates and marginal profitability of next available city pairs. Local monopoly, as it were.

Detroit is not as gate constrained but Philly. So incumbent pricing is not just about marginal flight cost but also marginal operating margin from alternate city pairs.

Legacy incumbents that own gate rights and landing slots at "full" airports like NYC etc likely consider marginal opportunity costs when setting prices at unconstrained (landing slots and/or gates) airports like Detroit.

Low cost airlines are unconstrained by these higher margin alternatives.


Professor: a few thoughts. Airline competition is very route specific. I do not have data handy to look at the Detriot-Philly route, but the price pattern you quote seems consistent with a fact pattern that this was a route subject to market power and supra-competitive pricing, which attracted entry (as we would expect). The entry occurred after 3 years (or more) of supra-competitive pricing. This seems like an odd example on which to base an argument that concentration is NOT a problem in the industry. Sure, entry eventually occurred. But, so what? All monopoly power is transient on a long enough time scale. That does not mean that there is not cognizable injury to consumers in the interim. I would note that the Horizontal Merger Guidelines state that entry needs to be timely (in additional to likely and sufficient) in order to ameliorate the adverse competitive consequences of a merger. Timely is generally take to be two years. By this metric, your example fails.

Several fairly obvious points occur to me, and would probably occur to any economist looking at this post (some of these will echo comments made by others).

1) Any discussion of trends in fares has to account for the now nearly universal practice of charging passengers for checked bags (only Southwest, as far as I know, does not do this). That means for anyone who checks a single bag, the price of a round trip ticket anywhere is up by $50 over the past couple of years. That's with the big airlines, anyway. Spirit, the supposed low-cost competitor, charges much higher checked bag fees, and also is a "pioneer" in starting to charge for a carry-on as well.

2) When I look at the price index in the FRED chart you link to, what I see is that in the early 2000s, when we had over twice the number of major carriers that we have today, the index tends to fluctuate in the 220-240 range. I don't know exactly what adjustment you'd have to make to the index to adjust for checked baggage fees, but it's hard to think that it would raise it by less than about 5%. That would mean that over the past 4-5 years, when we've been down to four major carriers, the index has fluctuated in the 280-320 range, with short-term ups and downs tied to oil prices, since even oligopolies are not free from begin constrained by resource prices (that are set by other oligopolies).

So what I see happening over the past 15 years or so is that concentration in the industry has gone up, and so have fares, quite noticeably. I think you have to be trying pretty hard to look at the data and not see that trend.

3) Any discussion of quality that does not take into account the well-documented shrinkage of seat size, and which cherry picks a single indicator to stand for quality, is not worthy of discussion.

Allowing cabotage (foreign airlines booking flights from city to city within the United States) would solve the problem literally overnight. Which is why it won't be allowed.

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