U.S. Airlines Face Antitrust Collusion Investigation–What’s The Big Deal?

Airlines, apparently including United Airlines, American Airlines, Delta Air Lines DAL -1.49% and Southwest Airlines LUV -0.77% are being investigated for collusion to limit seats and raise ticket prices by the U.S. Department of Justice, seemingly at the urging of Sen. Richard Blumenthal, who had called for investigations recently.

The claim is that airlines have signaled one another by such means as using the term “discipline” at industry conferences and public pronouncements.

Collusion or price fixing between competitors is seen as nothing more than a conspiracy to transfer wealth away from consumers, and enjoys little tolerance even from antitrust skeptics. For example, Robert Bork argued the practice involves no integration of productive capacity as do mergers, therefore nothing is lost by forbidding it. Collusion is treated as per se illegal and is subject to criminal as well as civil penalties.

Despite hating the middle seat, the increasingly cramped space, the loss of even so much as a packet of pretzels and peanuts, let alone a cross-country meal, and despite just plain not liking to fly, I need to object to more government involvement here. And meanwhile, I’ll note that collusion, opportunism and revolving door-ism among attorneys general, the antitrust bar, and the Department of Justice and the Federal Trade Commission is always somehow OK.

Except for the pre-existence of the companies involved, collusion resembles forming a partnership, entering a contract, or forming a company in the first place.

As a “partial merger” rather than a total integration, colluding “eliminates competition” less than full mergers do—yet mergers are legal and collusion is not.

Markets are dynamic: Just as coordination between individuals has benefits, so can other kinds of coordination to achieve certain business ends that can better serve customers. This won’t be the defense airlines use, but “restrictive” combinations of various kinds can be efforts by businesses to coordinate and cooperate, to adjust to uncertainties, to cope with imperfect information, to minimize transaction costs, deal with fixed costs and economies of scale, and address market oscillations that inhibit planning

Firms emerge precisely so that they can commandeer proprietary resources unilaterally, instead of having to contract and bid in the open marketplace for every needed input. These “islands of nonmarket control” are a central element of modern market production. Beyond the airlines, coordination will increasingly be a needed fixture in our technology-based economy for matters such as autonomous vehicle interoperability,  and cybersecurity, and interfirm R&D generally to allow resource pooling and avoid needless duplication.

Prohibiting cooperation has costs. Both competition and cooperation are legitimate features of a market economy, although enforcers will never admit that. Collusion and market division may be not only efficient but increasingly essential in a modern global economy that creates and commands vast resources. As economist George Bittlingmayer explains, “Restrictions on competition may have an efficiency defense, and a prohibition of cartel arrangements may entail costs as well as benefits.”

Even if price collusion were the result of deliberate anti-consumer mischief, we would be better off allowing markets, rather than regulators, to take their course and properly curb it. When all is said and done, the instability of inefficient cartel arrangements serves as a built-in insurance policy for consumers. Price (or seating) is only one of many variables that can be altered independently or agreed upon by firms. Even if price (or seating) agreements are made and “enforced,” colluders can “cheat” by competing on the basis of alternative features such as quality, delivery or service, warranties or other add-ons. That tendency to undermine agreements, to seek a bit of competitive advantage, renders inefficient arrangements unstable and sets in motion their destruction

Unless government enforces the cartel.

If consumer welfare is the goal, policy should not force firms to part with their own products and services for unattractive prices or on unfavorable terms. When testing and expanding markets, it is appropriate for any firm to seek agreements concerning the goods that it created, owns or both, just as it is appropriate for a consumer to exercise a right not to buy goods from a particular producer. This guiding principle derives from the tenet that no one can be compelled to produce products in the first place, but once one does, one should not lose rights to determine conditions on which the products are sold. We can all be shareholders in airlines and discipline them that way, too.

Competitive entry by rivals not party to a pricing agreement also disciplines colluders: If prices are too high or territories underserved, in they come. It’d be far more valuable for public servants to allow improvements in entry, airspace management, air taxis and so on to generate generous new supply. But note how that’s barely even part of the conversation. “Uber”-like airline service will face regulatory hurdles, and the ability of GPS to liberalize airspace isn’t getting emphasized enough, so this entire performance by DoJ seems hypocritical.