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Government as the Source of Monopoly: US Airlines Edition

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Tags Monopoly and Competition

06/16/2017

"Is Government the Source of Monopoly?" asked Chicago economist Yale Brozen in an essay first published in 1968. Yes, he answered — not only directly, by awarding exclusive licenses and contracts, but also indirectly, via regulation, minimum-wage legislation, and other forms of government intervention. Austrian economists such as Murray Rothbard and Dominick Armentano went further, arguing that monopoly per se is impossible on the free market, as long as government does not restrict entry into markets. More successful firms will tend to grow and increase their market share, but this does not constitute monopoly, as long as other firms are free to compete, or try to compete. The concept of monopoly only makes sense, theoretically and empirically, when the government protects privileged firms from competition, either directly or through the kinds of indirect means discussed by Brozen. 

I recently came across a lucid example of government-created monopoly in Thomas Petzinger excellent book Hard Landing: The Epic Contest for Power and Profits That Plunged the Airlines into Chaos (Crown, 1996). Petzinger explains the emergence of the US commercial airline industry in the 1930s as the result of efforts by Walter F. Brown, Postmaster General in the Hoover Administration, to reorganize the nascent airmail business. 

An outpouring of capital, loosed by the long-booming stock market and the Lindbergh hysteria, had turned the airmail routes by the early 1930s into an inefficient and illogical labyrinth. Brown's compulsion for order was offended. Instead of a crazy quilt of routes, he imagined clean lines running east and west, eliminating the circuitous zigzag of connecting flights by which one airline handed off mail to the next. To effect his plan, Brown went to Congress for the power to award postal contracts regardless of the amount bid. Then he called the principal airline operators to Washington and ordered them into a conference room with a map of the United States. For two weeks he cajoled them to swap routes, trade shares of stock in each other, and do whatever else it took to eliminate duplication, irrationality, and competition — in short, to divide the market to the exclusion of everyone who had not been invited to the meeting. A United official at one point turned to a lawyer and asked whether this activity might violate the Sherman Antitrust Act. "If we were holding this meeting across the street in the Raleigh Hotel, it would be an improper meeting," the lawyer answered. "But because we are holding it at the invitation of a member of the Cabinet, and in the office of the Post Office Department, it is perfectly all right." . . .

Guided by Brown at each turn, the operators emerged from their meetings with 90 percent of the nation's airways laced into three unbroken lines running from New York to California. United Aircraft & Transport controlled the northernmost route, via Chicago. Transcontinental & Western Air, or TWA, had the center route, via St. Louis. American Airways was given the southern line, via Dallas. A forth company, Eastern Air Transport, emerged with the routes running north and south along the Eastern seaboard.

The Big Four were born. 

Of course, bankruptcies, mergers, and limited entry have changed the US commercial aviation oligipoly into — well, a slightly different oligopoly. But domestic airlines are still heavily protected by government ownership of airports, government control of landing slots, the vastly outdated and inefficient government air traffic control system, and restrictions on foreign entry and foreign ownership of US carriers. 

Recent months have been tough on the US airlines, ever since Chicago cops decided to drag David Dao off a United flight. In many ways air travel has never been better, but of course there are many problems. How to solve those problems? Get government out of the way and let the market work

Peter G. Klein is Carl Menger Research Fellow of the Mises Institute and W. W. Caruth Chair and Professor of Entrepreneurship at Baylor University's Hankamer School of Business.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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