below what they would have been absent deregulation.^6 Since 1988, average
airfares have continued to decline (after adjusting for general inflation and
higher fuel costs).
However, in recent years, the advent of the “hub system” and the indus-
try consolidation via mergers have meant reduced competition on many
routes. American Airlines accounts for about 70 percent of all flights to and
from Dallas-Fort Worth. Delta Airlines controls over 75 percent of the traffic
in Atlanta, Cincinnati, Detroit, Minneapolis, and Salt Lake City. Together,
United Airlines and American Airlines account for some 85 percent of all
flights at Chicago’s O’Hare Airport. United and Southwest Airlines provide
nearly 60 percent of the flights in Denver. Fares at hub airports dominated by
a single airline tend to be more than 20 percent higher than those in com-
parable routes. Conversely, on routes where discount airlines have entered
and compete successfully with incumbent carriers, fares have dropped by 30
to 50 percent. Nonetheless, discount carriers complain of barriers to entry
(few or no takeoff and landing slots) and the predatory practices (incum-
bents’ sudden price cuts and flight increases) that keep them from compet-
ing on key routes.
Air route competition in Europe and the rest of the world is far behind
developments in the United States. European governments have a long history
of protecting national carriers from competition by foreign airlines. The result
is far fewer competing carriers on the major European air routes and, there-
fore, elevated fares. Because of protectionist policies, an intranational fare
(Paris to Marseilles) may be much higher than an intra-European fare (Paris
to Athens), which, in turn, is higher than an international fare (Paris to New
York). Indeed, protection from competition has led to inefficiency and high
operating costs (especially among the state-owned airlines). Because of high
wages and low labor productivity, operating costs at European airlines are more
than 40 percent above those of U.S. airlines. In short, high concentration
within Europe coincides with high costs (not economies of scale). Despite ele-
vated prices, most European airlines have struggled to break even. Only
recently have discount carriers like Ryanair and EasyJet begun to penetrate
important European markets, spurring incumbent carriers to cut unnecessary
costs and to reduce fares.QUANTITY COMPETITION
There is no single ideal model of competition within oligopoly. This is hardly
surprising in view of the different numbers of competitors (from two upward) and
dimensions of competition (price, product attributes, capacity, technological360 Chapter 9 Oligopoly(^6) See S. Morrison and C. Winston, “Airline Deregulation and Public Policy,” Science, August 18,
1989, pp. 707–711.
c09Oligopoly.qxd 9/29/11 1:32 PM Page 360