The Department of Transportation has launched still another investigation into Chicago-based Orbitz, the online source of travel information and reservations started up last June by a consortium of airlines. DOT wants to be sure that Orbitz is not “anticompetitive,” and thus violating antitrust laws.
The new investigation succeeds the inquiry that was completed last spring, before Orbitz commenced business, and the follow-up inquiry conducted last fall, when the department wanted to be sure the company’s actual operations were OK.
The real story is that industry incumbents are following the path blazed in the Microsoft case–trying to goad antitrust enforcers into suppressing innovation.
How Orbitz Innovation Reduces Costs
A good example of the potential savings from Orbitz’s innovation is that existing computer reservation systems (CRSs), which are used by travel agents to contact airline computers and actually book seats, charge roughly $3.50 per flight segment–or $14 for a typical round trip–for each reservation. In the near future, Orbitz will do the same chore with new technology, at far less cost.
Another example: The U.S. has 429 commercial airports, with 91,806 possible origin-destination pairs. Add in connecting flights, and the number of possible trips reaches the billions. Existing flight-search engines are based on 1970s mainframe technology. Their capacity is limited, and they must eliminate large numbers of possibilities at the outset. For example, they might search only for flights through a few specific intermediate stops.
The restrictions can miss some attractive fares. Orbitz, based on new technology developed by MIT alumni, need not impose any such arbitrary limits. The result is broader searches, more options, more competition among airlines and lower fares.
Orbitz is also increasing the honesty with which information is presented. Its charter requires it to display information according to price, number of stops, length of flights or other quality-of-service criteria. It is forbidden to favor particular airlines, such as those that own it or who advertise on Orbitz, or to bias the display in any other way.
The rise in availability of unbiased information helps consumers directly. It is also triggering another saving. Major airlines recently ended the practice of paying per-ticket commissions to travel agents. While commission payments had declined from a peak of about 11 percent of the ticket price a decade ago to about 5 percent, they still represented a large cost, paid, ultimately, by travelers. The saving is possible because the Internet is providing information that used to be provided by agents.
Good For Airlines, Good For Travelers
These developments are good for the airlines, which benefit greatly from the existence of good public information and the consequent savings in distribution costs. They are good for travelers, whose interest in eliminating unnecessary costs is at one with the airlines. Innovative travel agents are also happy because they are establishing new niches by creating airline/hotel/car/recreation packages to sell to the public.
There are also some losers, such as existing computer reservation system companies, travel agents who would prefer to be passive order takers, other online companies that dislike the additional competition and some low-fare airlines with an interest in forcing competitors to incur high distribution costs.
All these would like to use the club of antitrust to beat Orbitz to death. If they cannot kill Orbitz’s innovations, they can at least raise Orbitz’s costs and thus reduce its efficiency, and delay its growth by creating uncertainty and interfering with its access to capital markets.
It is time to return to common sense. Any innovation that improves information and reduces transaction costs is good for consumers. This is, or at least should be, the very definition of “pro-competitive.” So DOT should end its investigation, and Orbitz’s opponents should be told to compete in the market, not in the corridors of the bureaucracy.
Then we can all go find a bargain fare and take a trip.