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A simple idea for fighting global warming
Repeal the [should have read: "Institute an"] antitrust exemption for the airlines and approval all of their mergers, no matter what.
Higher P, lower Q. And maybe some groups outside the traditional green coalition would support such a change.
By no means a full solution, but maybe better than doing nothing.
Posted by Tyler Cowen on February 21, 2008 at 01:35 PM in Economics | Permalink
Comments
Huh? There's no antitrust exemption for airlines that I know of.
Posted by: David R. Henderson at Feb 21, 2008 1:42:05 PM
Um... I don't follow. Can someone explain this to me?
Posted by: Travers at Feb 21, 2008 1:56:54 PM
and increase taxation at the same time?
[and do nothing about the distributional impact? - OK if you're rich etc.]
Posted by: Luis Enrique at Feb 21, 2008 2:01:32 PM
Um... I don't follow. Can someone explain this to me?
Basically, let monopolies take over the airline industry. The prices will go up, fewer people will fly, and total greenhouse gas emissions will presumably fall as well.
Of course, this is an indirect and wasteful means to achieve an end much better sought through a carbon tax: namely, internalizing the social cost of carbon.
Posted by: Milan at Feb 21, 2008 2:10:28 PM
I think you want to get rid of those congressionally mandated routes first, right? Isn't that the number one source of empty seats? (or am I listening to my libertarian friends ...)
Posted by: odograph at Feb 21, 2008 2:11:15 PM
"Antitrust exemption"?
Hey, it isn't called "global warming" for nothing. Highest growth in airliner usage is coming from outside the U.S. (and likely from carriers who never land in the U.S.).
Posted by: ZBicyclist at Feb 21, 2008 2:12:19 PM
To end illegal immigration for farm jobs, make the minimum wage appplicable to agricultural workers. Farms will higher less, mechanize more, illegals will go home..!!
Posted by: jorod at Feb 21, 2008 2:14:47 PM
Tyler must have had his tongue at least partially in cheek; it's hard to imagine otherwise given his fondness for travel and his encouragement for others to travel.
Posted by: Frank at Feb 21, 2008 2:24:34 PM
Building a monopoly in the airline industry will be very difficult, if not impossible. So the major effect of this change would be to reduce the regulatory costs of the airlines that do want to merge, ultimately making air travel cheaper and increasing global warming.
Posted by: mobile at Feb 21, 2008 2:26:25 PM
Also more waste and less innovation. Seems pretty short-sighted.
...well, maybe it's perfect for the environmentalists, then...
Posted by: Chris at Feb 21, 2008 2:41:02 PM
I believe there are barriers to domestic and foreign airlines merging and/or buying each other, effectively shielding domestic lines from foreign competition (and vise-versa, I suppose).
However, I don't understand how allowing more mergers would increase the price of flying; generally you'd think the opposite would be true. I understand the barriers to entry are rather huge, so the market is quite a ways away from perfect competition, but higher (monopolistic?) prices seem hard to believe?
Maybe Tyler is referring to laws against the collusion of airline flight plans, which makes for more wasteful flights (i.e., empty seats). That would reduce Q, increase P on those flights that would otherwise be near-empty, and reduce fuel usage. That sounds like a good idea even if global warming were not an issue.
Posted by: Grant at Feb 21, 2008 2:52:19 PM
No, wait: Just go one step further. Make Amtrak responsible for managing the one remaining airline. Just imagine: $20K for a flight that might or might not ever depart or will be at least a day late arriving. That'll take a chunk out of that carbon source...
Posted by: Mike McHugh at Feb 21, 2008 3:02:43 PM
Tyler is just recycling the old adage in natural resource economics: monopoly is a conservationists best friend.
But, as Milan says, it is an indirect and wasteful way to implement the policy of 'fighting global warming.'
Posted by: Mike G at Feb 21, 2008 3:06:54 PM
Tyler is just recycling the old adage in natural resource economics: monopoly is a conservationists best friend.
But, as Milan says, it is an indirect and wasteful way to implement the policy of 'fighting global warming.'
Milan is way off base in thinking that the potential mergers of the big six U.S. domestic carriers into the big three would be a monopoly. Aside from the fact that three big suppliers is not a monopoly, there are other smaller domestic carriers, not to mention foreign carriers that fly (or could fly) domestically.
Mark Twain's native criminal class known as Congress should also repeal the restriction on foreign ownership of domestic airlines.
There is also competition from other suppliers, such as buses and trains, not to mention other business models such as video conferencing, which can reduce the demand for airline travel.
Posted by: Bill Stepp at Feb 21, 2008 3:35:02 PM
I think that people need to be a little more flexible in their definitions of "monopoly" as it applies to the airline industry. The fact that one company will never be able to monopolize all U.S. air travel does not mean that no airline will ever be able to exert monopoly power. A flight from New York to LA is useless for the person who's trying to get from Topeka to St. Louis, and as long as a given route has little or no competition, an airline will be able to charge monopoly prices on that route no matter who it's competing with on other routes.
Additionally, the lack of a true monopoly on a given route does not imply the inability to charge above market-clearing prices. Direct flights, or itineraries without long connections and/or layovers in cities that are far from the direct flight path, are clearly more valuable than flights with said layovers. As I see it, the hub and spoke system we have now is fundamentally designed to give airlines monopolies or near monopolies on as many routes as possible by limiting the number of airlines that will provide direct service to any given city whenever possible.
Posted by: Lee at Feb 21, 2008 3:37:05 PM
Less crowded airports and more pleasant passengers, all the while saving the environment? Sign me up! Let's get the poors out of air travel! It will also help the compulsive spenders save money by disallowing them to take such lavish vacations.
Posted by: GU at Feb 21, 2008 4:19:14 PM
Wouldn't many people who would otherwise fly, especially relatively short distances, say between New York and DC, now start driving, off-setting fuel consumption reduced from flying? Also, unless this leads to roads ridiculously crowded, there will probably be more highway fatalities.
Posted by: bronxilla at Feb 21, 2008 4:21:05 PM
Intelligent analysis, bronxilla. That's exactly what has happened where post-9/11 in-airport security delays increased the relative cost of flying vs driving.
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Posted by: John Dewey at Feb 21, 2008 4:49:44 PM
lee: "the hub and spoke system we have now is fundamentally designed to give airlines monopolies or near monopolies on as many routes as possible by limiting the number of airlines that will provide direct service to any given city whenever possible"
I do not believe that is the rationale at all for hub and spoke networks. I formerly worked for the orignator of hub-and-spoke airline networks.
Hub-and-spoke networks enabled expansion of air service to smaller cities. By combining passengers for many origin-destination combinations onto a single flight, hub-and-spoke allow many more frequencies between each city pair. For many city pairs, hub-and-spoke connectivity is the only economical service - such service would simply not exist in ansence of hub-and-spoke.
Hub-and-spoke networks both lowered cost of fares and increased service to America's smaller cities. Those networks actually increased competition by increasing the number of one-stop connections for each city pair. That's the opposite of creating monopolies.
Posted by: John Dewey at Feb 21, 2008 5:03:36 PM
Why grant a private monopoly to airlines? Tax them to achieve the exact same ends & get to keep the money in the public purse too.
Not that under plausible assumptions regarding global warming your proposal couldn't constitute a welfare improvement for society compared to the status quo. In any case, however, I don't think this policy options would score more points on popularity than a tax, so it's a non-starter.
Posted by: datacharmer at Feb 21, 2008 5:10:48 PM
The fact that one company will never be able to monopolize all U.S. air travel does not mean that no airline will ever be able to exert monopoly power.
...
Additionally, the lack of a true monopoly on a given route does not imply the inability to charge above market-clearing prices.
The concept of monopoly power has been refuted by Murray N. Rothbard in chap. 10 of his treatise Man, Economy, and State. I won't rehash his arguments here; you can look at it on your own (it might be on the web). As for airlines charging above market-clearing prices, that would be news to their long suffering shareholders. If airlines charge above market clearing prices, why have they always had low returns on equity, and low and erratic cash flows, and a history of losses and market-trailing stock prices as far as the eye can see?
Get rid of the cost curves and look at the real world of airline competition. Richard Branson, self-made billionaire and airline owner, said it's easy to become a millionaire. Just start as a billionaire and then buy an airline. So much for above market-clearing prices.
Posted by: Bill Stepp at Feb 21, 2008 5:24:50 PM
Bill Stepp: "why have they always had low returns on equity, and low and erratic cash flows, and a history of losses and market-trailing stock prices as far as the eye can see?"
I agree with your points, Mr. Stepp. But I did want to point out that the airline industry was profitable for 26 of the 30 years prior to deregulation in 1978. That's back when airline fares were beyond the reach of most consumers, when airlines were not allowed to compete on price, and before Bob Crandall initiated the service-expanding hub-and-spoke model which still dominates the industry today.
Posted by: John Dewey at Feb 21, 2008 6:39:50 PM
Bill, I don't think Rothbard's views are going to be very popular among the commentators here, but I could be wrong.
In any case, can anyone point to a time where monopoly power clearly and demonstrably harmed the consumer in America? The little I've read about antitrust legislation is that its a solution in search of a problem. Individual airlines aren't all that networked compared to other industries, so with the exception of large barriers to entry, I'm confused as to how any airline could harmfully wield monopoly power.
Posted by: Grant at Feb 21, 2008 7:00:49 PM
Hub-and-spoke networks enabled expansion of air service to smaller cities. By combining passengers for many origin-destination combinations onto a single flight, hub-and-spoke allow many more frequencies between each city pair. For many city pairs, hub-and-spoke connectivity is the only economical service - such service would simply not exist in ansence of hub-and-spoke.
Hub-and-spoke networks both lowered cost of fares and increased service to America's smaller cities. Those networks actually increased competition by increasing the number of one-stop connections for each city pair. That's the opposite of creating monopolies.
The hube-and spoke-system was indeed an enemy of monopoly. Fred Smith used it to undermine the Post Office's monopoly when he started FedEx in 1971, which is why the government tried to use its legal muscle to thwart his business.
Posted by: Bill Stepp at Feb 21, 2008 9:24:41 PM
Too simple.
With apologies to Monty Python, this is how that plan will work in practice:
"Shut up, shut up, shut up! Sex, sex sex, must get sex into it. Wait, I see a television commercial- There's this nude woman in a bath talking about airline mergers. That's great, great, but we need a doctor, got to have a medical opinion. There's a nude woman in a bath with a doctor--that's too sexy. Put an archbishop there watching them, that'll take the curse off it. Now, we need children and animals. There's two kids admiring the airline merger, and a dog admiring the archbishop who's blessing the airline merger. Uhh...international flavor's missing...make the archbishop Greek Orthodox. Why not Archbishop Macarios? No, no, he's dead... nevermind, we'll get his brother, it'll be cheaper..."
Posted by: David Tufte at Feb 21, 2008 11:10:05 PM
