Paving the Way for Oligopoly: Assessing the Impact of Airline Deregulation in the 1970s
Abstract:
The Airline Deregulation Act of 1978 fundamentally changed the history of the U.S. airline industry, thrusting the airlines from a state of government regulation into a truly free market environment that promoted natural competition. The goal of this study is to examine deregulation from a historical and economic perspective in an attempt to determine if deregulation has caused an oligopoly to form in the modern day airline industry. I contend that the Airline Deregulation Act of 1978, which deregulated the commercial airline industry in an effort to increase competition and lower prices, in reality did the opposite and inadvertently created a modern day oligopoly in the airline industry. This paper first introduces the origins of the airline industry and provides a history of how the airlines became regulated. Next, it analyzes what factors led to the signing of the Airline Deregulation Act of 1978. Then, this paper examines the effects that deregulation had on the number of carriers, concentration ratios of the top eight airlines in the industry, and value added of the airline industry to U.S. GDP. Next, using the theory of profit maximization and monopolistic competition, it introduces potential factors contributing to the fluctuation of concentration ratios of the top eight airlines in the industry. Finally, by means of empirical analysis, this study quantifies the causes of the fluctuating concentration ratios of the top eight airlines, concluding that deregulation has caused oligopoly.