Competition Policy and Merger Analysis in Deregulated and Newly Competitive Industries

Competition Policy and Merger Analysis in Deregulated and Newly Competitive Industries

Edited by Peter C. Carstensen and Susan Beth Farmer

This comprehensive book contains case studies on the evolution of competition policy, with an emphasis on merger policy, for seven major US industries that have experienced substantial deregulation in the past forty years – electricity, natural gas, telecommunications, railroads, airlines, hospitals and banking. Also included is a comparison of the EU’s experience in attempting to bring about competition in the energy, finance, and airline industries.

Chapter 6: Airline Mergers – Second-best Results in a Changed Environment

Peter C. Carstensen

Subjects: economics and finance, competition policy, industrial organisation

Extract

Peter C. Carstensen INTRODUCTION ‘Deregulation’ of the commercial airline service was the first major step in the process of limiting or eliminating conventional rate and service regulation in American commercial transportation markets. It is a misnomer to call this process deregulation because that implies that there is no legal oversight or control of industry conduct or structure (see generally Carstensen 1989). A more accurate description is that the nature of the legal controls over this industry changed dramatically over the past three decades. Individual airlines were freed to make many more decisions and new entrants were empowered to commence competition provided that they satisfied relevant entry requirements. Overall, most observers have concluded that the changes in regulation improved the quality of service and constrained prices (see, e.g., Kahn 1988; Levine 1987). There has also been a continued stream of critical commentary about the performance of the airline industry. The pricing and service of the leading firms (that some see as being both discriminatory and exclusionary) are among those concerns. In addition, collusive price setting has been a recurrent issue. On the other hand, financial instability has plagued the industry. Major airlines have had to seek protection under the bankruptcy laws repeatedly. New entrants have failed to survive with substantial frequency. The interaction of the patterns of prices and conduct reflecting market specific monopoly power and recurrent financial crises is consistent with the ‘hollow core’ theory of destructive competition. A market has a hollow core if no stable...

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