The USA has seen many horizontal mergers in recent years. This has turned industries that were once relatively competitive into oligopolies, resulting in lower output and higher prices for consumers.
In Europe, by contrast, many markets are becoming more competitive. The result is that in industries such as mobile phone services, airlines and broadband provision, prices are considerably lower in most European countries than in the USA. As the French economist, Thomas Philippon, states in a Guardian article:
When I landed in Boston in 1999, the United States was the land of free markets. Many goods and services were cheaper than in Europe. Twenty years later, American free markets are becoming a myth.
According to Asher Schechter (see linked article below):
Nearly every American industry has experienced an increase in concentration in the last two decades, to the point where … sectors dominated by two or three firms are not the exception, but the rule.
The result has been an increase in deadweight loss, which, according to research by Bruno Pelligrino, now amounts to some 13.3 per cent of total potential surplus.
Philippon in his research estimates that monopolies and oligopolies “cost the median American household about $300 a month” and 
deprive “American workers of about $1.25tn of labour income every year”.
One industry considered by the final two linked articles below is housebuilding. Since the US housing and financial crash of 2007–8 many US housebuilders have gone out of business. This has meant that the surviving companies have greater market power. According to Andrew van Dam in the linked Washington Post article below:
They have since built on that advantage, consolidating until many markets are controlled by just a few builders. Their power has exacerbated the country’s affordable-housing crisis, some economists say.
According to research by Luis Quintero and Jacob Cosman:
… this dwindling competition has cost the country approximately 150 000 additional homes a year – all else being equal. With fewer competitors, builders are under less pressure to beat out rival projects, and can time their efforts so that they produce fewer homes while charging higher prices.
Thanks to lobbying of regulators and politicians by businesses and various unfair, but just about legal, practices to exclude rivals, competition policy in the USA has been weak.
In the EU, by contrast, the competition authorities have been more active and tougher. For example, in the airline industry, EU regulators have “encouraged the entry of low-cost competitors by making sure they could get access to takeoff and landing slots.” Politicians from individual EU countries have generally favoured tough EU-wide competition policy to prevent companies from other member states getting an unfair advantage over their own country’s companies.
Articles
Questions
- What are the possible advantages and disadvantages of oligopoly compared with markets with many competitors?
- How can concentration in an industry be measured?
- Why have US markets become more concentrated?
- Why have markets in the EU generally become more competitive?
- Find out what has happened to levels of concentration in the UK housebuilding market.
- What are the possible effects of Brexit on concentration and competition policy in the UK?
There has been talk for some time about the possibility of standing room on flights, but it is hardly surprising that this has been rejected by the Civil Aviation Authority. Not the safest option, you might say, nor the comfiest – certainly not for a long haul flight to the other side of the world! However, this could be coming closer to reality, as we see The Skyrider, which is a new saddle-style airplane designed by Avioninteriors. It has yet to be snapped up, but Ryanair could be top of the list with their plans for a new style of flying.
It may not be quite what you imagine – you don’t literally stand up in the stalls at the front of the aircraft. Passengers will have seats, but these seats give a completely new meaning to ‘upright seats’. Seats would be 23 inches apart (some 10 inches closer than we’re used to), but they would only be available for flights up to 3 hours. Despite the publicity, the design is yet to be approved. Ryanair believe that such a design would increase passenger capacity by some 40%. However, passengers remain rather skeptical, as many struggled to fit in to the seats when it was unveiled in New York.
Technological development is vital in any dynamic industry, but is this one step too far? One day, it could be a game of sardines when packing passengers into a plane!
New airline seat for Ryanair resembles a saddle Irish Central, Molly Muldoon (18/9/10)
New plane ‘saddle’ would pack in passengers Edmonton Journal (19/9/10)
Ryanair one step closer to fulfilling dream of getting more people on each plane Travel News, Natalie Cooper (16/9/10)
Budget airlines love bad new stories about how cramped their planes are Telegraph, Harry Mount (15/9/10)
Behold! The world’s most cramped airline seat Reuters, Charlie Sorrel (13/9/10)
Questions
- Is it a rational decision for a passenger to travel in a new upright seat?
- Is it a cost-effective strategy for Ryanair or any other airline to adopt? Explain (a) why it is, but also explain (b) why it may not be cost-effective.
- Using a diagram, illustrate the opportunity cost to an airline of providing more upright seats.
- If successive airlines adopt the new saddle style seats, what is likely to happen to the price of such seats?
- As passengers become aware of these cheaper seats, what is likely to happen to the market price? Illustrate this on a diagram.
- If Ryanair were the only airline to offer such seats, does this mean it would have a monopoly? Explain your answer.
Two of America’s airlines have agreed to merge to form the world’s largest carrier. The deal between United and Continental Airlines is worth £2.1 billion and the management of the two companies hope that the new airline, to be called United Airlines, will bring cost savings of some £800 million per year. Last year, the two companies lost a total of £900 million. It is also hoped to increase revenues by providing more routes and more effective competition against rivals, such as Delta Air Lines.
But just how significant will any economies of scale be and to what extent will they involve job losses? Certainly the merger has been greeted with caution by the Air Line Pilots Association and unions such as the International Association of Machinists and Aerospace Workers. Also, will the larger company be able to compete more effectively to the benefit of consumers, or will the increased market power see a rise in fares?
And this is not the only airline merger. In April, British Airways and Iberia of Spain signed a deal to merge, thereby creating one of the world’s biggest airlines. Other mergers are expected as airlines battle to cope with rising costs and lower passenger numbers in the wake of the global recession. So will such mergers benefit passengers, or will it simply result in less choice and higher fares? The following articles look at the issues
Articles
1st priority for new United-Continental combo: Keep customers, workers happy Chicago Tribune, Julie Johnsson (3/5/10)
Debating future of US Airways Philadelphia Business Today, Linda Loyd (4/5/10)
Arpey points out good, bad of United-Continental deal The Dallas Morning News, Terry Maxon (3/5/10)
US airline merger creates world’s biggest carrier Independent, Nick Clark (4/5/10)
We can’t fix fares, says chief of merging US airlines Telegraph, James Quinn (3/5/10)
United and Continental Airlines to merge BBC News (3/5/10)
British Airways and Iberia sign merger agreement BBC News (8/4/10)
Are mergers good for airlines? BBC News, Edwin Lane (4/5/10)
United boss Glenn Tilton on Continental merger BBC News (3/5/10)
United and Continental bosses’ press conference on merger BBC News (3/5/10)
Data
Aviation Data & Statistics Federal Aviation Administration
TransStats RITA, Bureau of Transportation Statistics
Airline and Airport Statistics European Regions Airline Association
Questions
- What type of merger is the one between United and Continental: horizontal, vertical, conglomerate or a mixture?
- What types of economies of scale can be achieved by a merger of airlines?
- For what reasons may a merger of airlines result in higher revenues?
- To what extent will passengers (a) gain and (b) lose from airline mergers? What determines the size of these gains and losses?
- Is the airline industry an oligopoly? To what extent is there collusion between the various airlines?
- What should be the attitude of regulatory authorities across the world to airline mergers?
In October 2004, the USA brought a complaint to the WTO that Airbus had received illegal subsidies from the UK, French, German and Spanish governments. One of these subsidies was the so-called ‘launch aid’, which the US government argued was a form of export subsidy. In a counter-complaint to the WTO made on the same day, the EU maintained that the US government had provided illegal support to Boeing in the form of subsidies, legislation, regulations and other administrative measures.
On 4 September 2009, the EU and the USA were handed the confidential preliminary findings by the WTO panel in the first of the two disputes. This found that some of the support measures by the EU countries violated WTO rules. However, some two thirds of the complaints by the USA were dismissed.
Despite some progress in its deliberations, the WTO is unlikely to give a final judgment in the first case for several months and not even a preliminary report has been issued on the second case (the EU’s complaint against the USA). But can any conclusions be drawn at this interim stage? The following videos and articles look at the findings and their implications.
Videos
Airbus violated trade laws msnbc news (4/9/09)
WTO issues report on Airbus-Boeing dispute AlJazeera (4/9/09)
Update – Boeing vs. Airbus Bloomberg (4/9/09)
Articles
Airbus Loans Toward A380 Jumbo Faulted in WTO Ruling Bloomberg (4/9/09)
World trade body ruling reflects pre-crisis time Boston Globe (Associated Press report) (5/9/09)
WTO rules that Airbus benefited from E.U. subsidies MarketWatch (4/9/09)
Boeing wins first round in trade battle with Airbus Independent (5/9/09)
WTO rules on huge plane dispute BBC News (4/9/09)
Boeing and Airbus: Round one to Boeing The Economist (4/9/09)
Partial US victory on Airbus funds Financial Times (5/9/09)
Questions
- What sanctions does the WTO have to enforce its rulings? (see the WTO site.)
- What sanctions do individual governments have for ensuring that countries abide by the WTO rulings?
- How could strategic trade theory be used to justify support to aircraft manufacturers? Do such arguments apply to Airbus and Boeing?
- Do airlines and airline passengers gain or lose from the behaviour of Airbus and Boeing? Should the WTO take this into account?
There are seven Indian airlines: state-owned Air India and six private carriers. Since the onset of recession they have all been making losses and were considering a one-day ‘strike’ when services would be removed. The aim was to force the Indian government to reduce fuel and airport taxes.
Do the losses suggest that there is overcapacity in the Indian airline market? Does it matter if, during the current recession, some airlines go out of business? Are bankruptcies necessary if the surviving carriers are to be stimulated to make cost savings and are to achieve sufficient economies of scale? Or should governments offer support to struggling airlines? Is oligopoly the best market structure for such an industry and, if so, how can collusion be avoided? The following articles consider these questions.
How many airlines do we need? Business Line (The Hindu) (4/8/09)
Indian airlines call off Aug 18 strike Forbes (3/8/09)
When corporations capture the state Rediff Business (7/8/09) (see middle part of article)
Blaming everyone else Indian Express (3/8/09)
India’s air carriers spin loss riddle Asia Times Online (8/8/09)
A strategic vision for Indian aviation The Economic Times (8/8/09)
Flight to value The Economist (6/8/09)
Federation of Indian Airlines
Questions
- Describe the features of the market structure in which Indian airlines operate.
- Is the Federation of Indian Airlines a cartel?
- Should (a) any; (b) all Indian airlines be given government support, and, if so, what form should the support take? Should Air India be treated differently from the other Indian airlines? Explain your answer.
- Is it in Air India’s long-term interests to embark on a price war with the other Indian airlines?
- Is oligopoly necessarily the optimal market structure for a capital-intensive industry?