Collusion in the air

Currently there is a group of transatlantic flight providers who are colluding on prices. The big problem is that the Department of Transportation has no intentions of stopping it. Star, oneworld, and Skyteam are able to not only agree on the prices of transatlantic flights but they are also allowed to share the cost. When passengers are in search of a ticket if there are any connecting flights and one of the providers is not a member of the alliance the providers will actually increase the price of their flight to detour passengers from selecting that flight option, which in turn will encourage passengers to select flights from the alliance members.

One great thing about the free market is that when it is allowed to work and move properly the market will find the equilibrium price for goods. In the article the writer encourages Congress to allow the Department of Justice to aid in the situation to make the three producers compete more directly with one another, and to look for opportunities to help other producers to survive.


Dr. Tufte said...

This makes me wonder two things.

First, why doesn't the government correct this? My guess is that the people who are affected are not in the location where the government has the most regulatory power.

Second, why doesn't the market correct this? Here, my guess is that passenger air travel is so close to zero profits that there isn't enough leeway to make undercutting feasible here. This weeks bankruptcy of one of the major American transatlantic carriers tends to support that.

Papa Smurf said...

I like your point number two. That makes sense that the profits would be so low that the competition really cannot undercut the prices. And the fact that the airline filed bankruptcy would suggest to me that right now the price of airfare is below the equilibrium price. So the consumer surplus in this market would be higher than the producer surplus as well.

Windwalker said...

Dr. Tufte inquires as to why the government doesnt do something about this. When its time for one of them to be bailed out or its politcially rewarding to do so, something will probably be done. Sad, but true.

Dr. Tufte said...

I actually think the last two comments complement what I wrote, albeit in a backdoor way.

There's this funny thing I've noticed: cash flow in big, easy to carry, bags gets the government's attention.

Yes, I'm being hyperbolic. But the metaphor can be informative: perhaps government doesn't do anything about this because, since the airline industry is near zero profits, there isn't much cash to be had by interfering.