COMMENTARY airport leases, for example, last from ten to thirty years. Buying a competitor, or driving him out of business, may not result in effective new competitive entry. Second, the contest to decide who is IS THIS REALLY bought or driven out is not based neces­ sarily on fair market competition where NECESSARY? the firm with the best service or most r efficient operation prevails. For example, some airlines control the travel agency computer systems booking much of the AIRLINE DEREGULATION: customers, and then force them to pay full nation's travel. When the system of CRASH LANDINGS AND THE fare in order to get the flights they need. American Airlines or United Airlines is PARACHUTE OF ARISTOTLE Then I got my American Airlines used, one does not have to guess to predict mileage statement. They have now that the layout of fares, the orderof presen­ Having collected almost 100,000 fre­ declared that my mileage may "expire" tation, and other marketing techniques quent flyer miles on USAir, I decided to and they are going to start subtracting used by the airlines controlling the com­ visit my son at his school in North mileage earned more than a given number puter booking systems will favor their Carolina. I got my "certificate" and called of years ago. Needless to say, this was not own flights. Of course they do. USAir over one month before the flight. the focus of the "American Advantage" But the most major unfair practice cur­ This was October, not a holiday in sight. I advertising campaign when I signed up. rently extant and thriving favors the "deep asked for a reservation. All flights were These and other airline deceits are jus­ pocket" carrier, or the carrier with an area open-I could fly direct, and I could leave tified on an interesting legal basis. To of monopoly power which may be ex­ whenever I wanted. Then I mentioned that those who object, the airlines point to a ploited to cross-subsidize operations this would be paid by a frequent flyer small-print clause in an obscure document where it has competition. The consumers mileage certificate. "Oh, well, we do not saying that "rules are subject to change." in the monopoly market are egregiously have space for you on any of those In other words, we can promise you overcharged so that one competitor may flights," Fay of US Air explained in a prac­ whatever we want, but we will not be held drive out of business possibly more effi­ ticed monotone. "Well, what do you to our representations because of a cient carriers in another market. have?" "We have a red-eye going into clause-which we wrote-giving us the The competitive pattern in this in­ Pittsburgh which will connect into North right to change the rules anytime we want dustry has increasingly degenerated into Carolina the next day, and the trip back is to do so. We reserve the right to give price discrimination and predation, lead­ pretty much the same; it will have to be the ourselves permission to lie to you. This ing to bankruptcies and "industry all-nighter with two stops and plane chan­ theory has never been tested in court as a shakeouts," which then become tight ges, taking a day and a half." "Wait a defense, probably because no attorney oligopolies acting as cartels. That is, once second, a moment ago you told me you wants to risk the ridicule of raising it. the aggressive price competitors are either had space everywhere. Now you have purchased or driven out, the sagacious nothing and the flight's more than a month deep pocket survivor will likely benefit away in a non-traffic period. How come?" Airline Unfair Practices and from a resulting "I will fight no more Anticompetitive Results forever" oligopoly-the economic term "Well, we only allocate some of our seats 3 for the frequent flyer program." "Oh, I for a shared monopoly. don't remember seeing that in the ad ... how These practices are, regrettably, If one of the carriers is particularly many seats on the twelve direct flights I symptomatic of a much deeper malaise large, it will likely set the rates. Quite apart cannot get have you reserved for frequent affecting the nation's air carriers. Beyond from the mutual advantage, none of the flyers?" "I cannot give you that informa­ the open gauntlet of advertising deceit is small competitors dares to compete if it tion." a collection of competitive abuses war­ believes that the larger firm can and will ranting greater concern. Most of them go below cost if it is sufficiently irritated, have arisen following the Airline financed by either its larger size or by its Airline Deceptive Practices Deregulation Act of 19782 and the sub­ surfeit of monopoly business in other sequent dismantling of the Civil markets.4 I had just been the victim of a classic Aeronautics Board in I 985. First, there To be sure, the model of the free market "bait and switch" unlawful business prac­ has been increasing concentration of may dictate a challenge where prices are tice. You advertise a benefit to bait con­ ownership. During the last quarter of excessive. The reality, however, usually is sumers; then you either disparage or even 1986, a spate of mergers occurred, and the not a challenge, but conservative actions refuse to provide the advertised bargain, trend is clearly in the direction of con­ to maintain the small marketshare which "switching" the consumer to a high-profit solidation. In California's market alone, gives the large entrepreneur "cover"-the product or service. 1 USAir bought out PSA, American Airlines patina of a non-monopoly-while all par­ And it wasn't just USAir. Southwest gobbled up AirCalifomia, Delta took over ticipants eventually move toward the ex­ Airlines did the same thing the following Western Airlines, and Alaska Airlines cap­ traction of excessively high prices. This is year. They widely advertised their "buddy tured Jet America. not a zero sum game; it is better to achieve fare" -on certain flights over certain Although economists will point to a mgher rate of return on a small market­ periods, buy one ticket and get another for theoretical "ease of entry" into the airline share than to risk a competitive war which your buddy for free. But it turns out they industry, one has to have gates at the air­ will have to be lost by you. And once the do the same thing-reserve a very small ports. Major airports grant long-term large entrepreneur has actually demon­ number of seats for the program to attract leases; Los Angeles and San Francisco strated a willingness to go below cost to The California Regulatory Law Reporter Vol.12, Nos. 2 & 3 (Spring/Summer 1992) Ir COMMENTARY drive others out, the lesson is easily price competition, except it has two draw­ tion prohibitions which properly apply to learned. In the real world, entrepreneurs backs. First, while it is going on, it grossly the competitive sector. would rather make friends with a stronger misallocates resources. Passengers pay At least theoretically, the Gompetitive bully than risk annihilation-so long as distorted prices where carriers are not sector of the marketplace is also subject to the bully makes room for their comfort­ engaged in battle. For example, Alaska societal safeguards and limitations. If you able operation. Although at odds with Airlines has a virtual monopoly on intra­ lie, you are punished. Deceptive advertis­ economic theory, this human pattern Alaska air travel. It is not surprising that ing is actionable. You cannot engage in seems rather obvious to anyone who is not the fares from Juneau to Anchorage, Fair­ unfair competition without sanction. Price seeking-or has not already obtained-a banks, or other cities in Alaska are much, discrimination with the intent or effect of Nobel prize in economics. much higher per passenger mile than they lessening competition is unlawful. This predictable pattern is exactly are in Alaska's California operations Predatory practices violate Business and what has been happening in the airline (where it faces competition from South­ Professions Code section 17000 et seq. industry: occasional but vicious price west). Alaska also uses its reservoir of And so on. Not only are these laws applied wars, followed by bankruptcies, mergers, monopoly power to finance its contest in properly to this particular industry, but and then oligopoly leading to price in­ California. While this is going on, people much greater scrutiny is justifiable given creases and service diminution. When travelling in Alaska are paying unfair and the common carrier nature of the industry they see this dynamic, the free market­ excessive charges for air travel. and the tendency toward oligopoly. And obeisant economists like to argue that all Second, although those of us in San finally, where the passenger volume or is well-the market is supposed to shake Diego are delighted to be the subject of a other market features are not amenable to out the inefficient. True, but the market price war, it is a Pyrrhic and temporary real and continuing competition, there should be doing so based on performance victory for us. At some point the war will must be regulatory oversight-including in the marketplace and the exercise of end, usually one of three ways: Southwest rate review. The framework underlying consumer choice, not based on deep pock­ will be bought out to get rid of the an­ these positions should not be controver­ ets or unfair practices. And the result noyance; Southwest will be driven out of sial.