Term Paper on "Monopolies v. Competition"

Term Paper 10 pages (2694 words) Sources: 8 Style: APA

[EXCERPT] . . . .

Monopoly vs. Competition

This paper presents an in-depth examination of the airline industry and the recent arguments over whether airline companies are being conducted as monopolies or competitors. The writer uses several examples of congressional testimony to illustrate the differences between the two. The writer also uses other chosen pieces of literature to discuss the difference between an airline monopoly and competition. There were eight sources used to complete this paper.

In recent years, there has been much attention paid to the airline industry and how it is conducting itself in business as a whole. While security became a major issue following the events of 9-11 it was not only security that was impacted on that fateful day. In addition, many of the airlines took a serious financial loss because people became afraid to fly, or stopped flying due to time constraints of the new security measures or decided not to fly for other reasons. On top of that, the skyrocketing fuel prices in the past 18 months have created a situation where airlines are being forced to raise fares to an already shrinking customer base. While all this was occurring airlines began to shift the way they were doing business in an effort to stabilize. Some airlines survived while others did not and were forced to file bankruptcy, ego up for sale or close all together. The airline industry has heard accusations of becoming a monopoly industry over the past decade and worldwide, trade organizations, anti-trust watch dogs and others have begun keeping a close eye on how airline companies conduct themselves. When found to be a monopoly they are being punished but if they are deemed to be acting like business competitors they are which has created an atmosphere of walking a thin line between the two in the effort to survive.

Monopoly

Before one can begin to determine whether an individual airline is conducting itself as an illegal monopoly or a legal competitor it is important for one to have an understanding with regard to what an airline monopoly is and how it usually operates. This can be a very tricky and complicated question because of the overlapping similarities they both display.

In 1978, there was a law the federal government enacted the Airline Deregulation Act which was meant to create an explosive growth in competition between the airline companies. For the most part this effort was deemed to be successful however, in airports such as Buffalo, New York where the lower fare airlines made the decision not to fly in and out of the customers were left with no choice but toe purchase the higher priced tickets. It set the stage for monopoly behaviors even if it was not a true, forced monopoly, but instead one that was being created by the choice of low fare companies to ignore certain hubs across the world (Kaplan, 1998).

Prices can be whatever they want to be, and people are pretty much forced to fly those limited options," said Richard Geiger, president of the Greater Buffalo Convention and Visitors Bureau. "For Buffalo, I guess deregulation really hasn't been the answer (Kaplan, 1998)."

Following the deregulation act there were four major contender airlines that found themselves headed to court accused of being monopolies. They were United Airlines, Northwest Airlines, American Airlines and Delta Airlines.

A monopoly in any business is a company that is set in such a position of power that they become the only providers of particular goods or services available to a particular customer base. Once this happens, the company in question can pretty much set the price and any price it desires because it has previously driven out the competition to the point of being in complete control over the industry.

Lawsuits with regard to the monopoly status of airline carriers are caused by criticism that the carrier becomes so powerful the customer becomes the victim.

The thrust of that criticism: The industry's four giant carriers have become so powerful and monopolistic that they are thwarting the competition envisioned by Congress 20 years ago (Kaplan, 1998).

The large carriers have... allowed each other to carve up the country," said Bob Schulman, a spokesman for Frontier Airlines, a 4-year-old carrier based in Denver. "The issue now is: 'Are these carriers, through their strength, inhibiting competition (Kaplan, 1998)

From 1978 to 1998, more than 100 airlines were driven out of business, allegedly due to the tactics of the larger, stronger airlines desire to control the skies. Many court cases have been heard in which the court had to decide whether the stronger, larger airline really created a monopoly for itself or if the smaller weaker airline simply could not conduct itself as an efficient, competitive business in its own right through no malicious fault on the part of the larger companies (Kaplan, 1998).

Along the way, the windfall to consumers has been impressive. Economists estimate that competition among the airlines is saving U.S. residents between $6 billion and $12 billion a year in lower fares. The number of commercial airline passengers has doubled during the past 20 years, adding more than 255,000 jobs industry-wide. And the number of annual flights offered by U.S. airlines has jumped 64% to 8.2 million. But critics say deregulation has a darker side: The companies that have survived and profited from deregulation, they argue, have become adept at preying on anyone else who wants a piece of the action (Kaplan, 1998)."

One of the benchmark measurements that are often examined in the discussion of airline monopolies, versus competitors is whether or not there were federal anti-trust laws violated. If anti-trust laws are found to have been violated it is quite possible that the argument the airline has conducted itself into a monopoly would be valid and justified. If no anti-trust laws have been broken then the airline has a good chance at proving it is doing nothing more than conducting itself as a competitor in a highly competitive and volatile industry (Kennedy, 1997).

In one instance Northwest Airlines was sued along with Republic Airlines with the claim that they were knowingly overcharging for their tickets.

The suit attacked Northwest for charging an estimated $400 million in annual air-fare premiums to passengers at Minneapolis-St. Paul International Airport, where Northwest dominates about 80% of the traffic. About 30 million passengers annually use the airport (Kennedy, 1997)."

The allegation was that the airline broke anti-trust laws by price fixing which is where the large, strong company manages to shut out competitors and then place prices on goods or services that are unreasonable and simply there because they have begun the only game in town.

Northwest was also accused of monopoly action when Reno Air filed suit alleging NWA was maintaining monopoly power over other airlines by forcing out any new airlines to the area.

The alleged exclusionary practices employed by Northwest included intimidation of travel agents, predatory frequent-flier programs, duplication of flights and below-cost pricing, according to Reno Air's complaint in U.S. District Court in Nevada. The litigation seeks unspecified damages (Kennedy, 1997)."

What happens in a monopoly situation is that a large strong airline sees a new, financially weaker competitor coming into an area and decides to drop its prices so low there is no way that the smaller, newer airline can compete. The larger airline loses money on the fares but because it has such a strong financial foundation it can afford to lose money long enough to drive the smaller airline out of the area or hub. Once that happens the larger airline immediately doubles or triples its prices to get the customer to pay for all of the money lost during the wait out with the smaller airline.

The problem becomes proving that the price drop was truly for the purpose of driving a new or smaller airline from the area, and not just a natural progression of healthy competition for consumer dollars.

In most cases the monopoly occurs when the service or seat is being sold below what it costs the airlines to run the company.

A reasonable person can see that such tactics cannot be upheld for the duration of the airline's existence, or the airline would eventually go out of business. When a large powerful airline does drop their fares to below cost, and holds them there, it is usually for the purpose of driving out a competitor at which time they immediately double their ticket price to regain some of the lost funds.

China showed the world a prime example of the difference between competition and monopoly when it dismantled the state run airline industry and created an atmosphere of privately owned airline companies.

While there are often price wars among the airline companies in China the larger focus is on providing the customer with the best possible service, upgrading equipment and improving flights as time goes on (Thoung, 1997).

These elements are allowed and encouraged as part of a competitive base and are not considered a monopoly… READ MORE

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