Increasingly, Americans are losing faith in their government. The U.S. Department of Justice's action against American Airlines on Thursday underscores why. The lawsuit seeks to penalize American for "saturating their routes with additional flights and cutting fares" at Dallas-Fort Worth International Airport. Consumers who thought more service and lower fares were good things are right to be puzzled and dismayed.
The action is based upon an antitrust theory known as "predation." The argument is that a company can drive its competition out of business by increasing production and lowering its prices below cost.
But to make the gambit worthwhile, the predator not only must make monopoly profits at the end, but also make up its losses — plus interest. That's hard to do, especially when another firm could at any time enter the market and ruin the whole thing. That's why most economists agree that predation rarely (if ever) works. As antitrust experts Donald Boudreaux and Andrew Kleit once put it, predation is the Loch Ness monster of public policy.
Even so, shouldn't antitrust regulators aggressively search out possible cases of predation — as they have done with American? The problem is that harmful predation is awfully hard to distinguish from good, old-fashioned competition. As a result, prosecutors are inevitably going to destroy more competition than they save. The implicit message of predation cases will be "slow down, don't compete too hard." Every price cut, every increase in service will come with a lawyer's warning: Don't go too far. That might be good for some businesses, but not for the consumer.
Better ways exist to ensure vigorous competition in the airline business. Rather than worry about low prices, policymakers should make more room for competitors in the airport and airway system. This should include eliminating artificial controls on landing slots at airports, or even privatizing our antiquated and bureaucratic air traffic control system.
Only through steps such as these — which foster marketplace dynamism, rather than destroy it — can policymakers ensure that competition in air travel will thrive.