Freeman

ARTICLE

Higher Airfares Ahead?

Matching a Competitor's Low Price Is Not an Act of Collusion

APRIL 01, 1994 by WILLIAM L. ANDERSON

Filed Under : Competition

Last summer, I flew to the Northeast to participate in a seminar on teaching economics. In the process of buying my ticket, however, I learned an important economic lesson in this post- Airlines Antitrust Litigation age: antitrust decisions usually do not benefit consumers in general.

For many years, I have almost exclusively flown Delta Airlines, which means I have been able to build up frequent flyer miles. But when I called my travel agent to purchase a ticket for my flight to Philadelphia, she informed me that a competing airline could take me to my destination for $50 less than Delta. I asked about the possibility that another fare war might begin, allowing me to fly my preferred airline for a comparable price, but she said she had no such information. Given this meager bit of knowledge, I decided to go with Delta’s competitor.

In less than a week, a fare war did begin and Delta’s charge for the Atlanta to Philadelphia route was $152, nine dollars less than what I had just paid. In other words, had I waited a few more days, I could have had my low fare and Delta.

What is galling to me is that a year ago, my travel agent could have tipped me off about a coming fare war. Since last year, however,

Delta and several other airlines settled a class action lawsuit which accused them of price fixing and other antitrust violations. One of the provisions of the suit was that the airlines could not notify customers of impending price cuts; that is considered collusion.

Thus, a provision of a legal settlement which supposedly was meant to help consumers like myself receive a better deal has actually forced me to pay more for less service, part of the law of unintended consequences. It is no accident that this situation has occurred, the way that the plaintiffs (and antitrust lawyers from the federal government) define competition, price fixing and collusion almost guarantee that any “solutions” they impose will be anticompetitive.

In the academic world of antitrust “experts,” prices are objective (and purely a function of cost-plus), and, in most situations, are subject to few restraints. The “experts” believe that information which is shared by more than one firm will automatically lead to collusion, and if two or more firms charge the same price for a good or service, that is prima facie evidence of price fixing. Therefore, according to their definition, competition will better serve consumers when everyone has less information to help them make choices.

The real world offers a different and more accurate definition of competition. Prices, far from being something that can be objectively calculated by a central authority, are subjective and reflect the values of buyers and sellers at the point of purchase. Matching a competitor’s low price is not an act of collusion. Rather, it is a tool that allows a producer to remain an equal participant in the marketplace. Competitive situations require that participants be as well informed as possible, not left groping in the dark.

I predict that the antitrust settlement will lead to higher, not lower airfares. Perhaps, this is why the airlines so eagerly embraced it; it will give them a chance to reap some badly needed profits while operating under an agreement which has produced a public perception running counter to the truth.

ASSOCIATED ISSUE

April 1994

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