Airline Mergers and Oligopoly Pricing

In an editorial titled Some Myths About Airline Mergers, the Wall Street Journal today comments on the potential impact of a Delta-Northwest combination.

There is no question that the track record of airline mergers has been mixed, but the entire industry is the product of consolidation…. The industry that has resulted is the most competitive in the world, and provides Americans with far more airline service, at much lower prices, than before the industry was deregulated.

I think this is demonstrably correct. Although I can — and often do — complain about travel as much as the next frequent flier, the reality is that airlines give consumer exactly what they want. As customers, Americans have been seduced by cheap air fares and continue to insist on low prices despite the “costs” associated with them in reduced service, meals, baggage allowances, etc. The airline industry charges lower prices today than a decade ago, despite substantial consolidation and massive, billions-per-year operating losses. As a matter of economics, those facts teach that the market is highly competitive.

Some year ago, “oligopoly theory” was all the rage, predicting (like the standard Justice Department Merger Guidelines) that increased concentration in a market is likely to result in higher prices, as no firm in an interdependent market would risk a price war. In today’s economy, airlines — together with cellphone and wireless services, automobiles and numerous other highly concentrated markets — are proving that to be a big myth.  Some antitrust Neanderthals may disagree, but IMHO they are reading from a hymnal that no longer has much spiritual resonance.