Since deregulation, the major US airlines are exhibiting prominent oligopolistic characteristics.  An oligopoly exists when high barriers to entry result in a few interdependent companies controlling the majority of a market. In the airline industry this includes high set up costs, legal requirements, existing brand loyalty and extensive economies of scale. The five major airlines in the US market collectively comprise of 69.5% market share, and a 70% portion of the entire industry revenues.

This is advantageous for the producers in a market, because cartel behaviour eliminates the uncertainty of price rivalry. The airlines are likely to have entered a strategic arrangement called collusion, through formal agreement, to charge a certain fare that ensures higher profit margin collectively, that is more mutually beneficial than entering price war to gain competitive edge. Along with controlling the price competition, they may control non price competition too, for example, by jointly disagreeing upon elaborate and expensive marketing campaigns.

Consumers will have to comply, as high concentration reduces consumer choice and given the lack of competition, oligopolists are free to engage in the manipulation of consumer decision making. Also, an oligopolistic industry is generally allocatively and productively inefficient, resulting in potential welfare loss. Customers pay, and conversely firms receive, a relatively higher price than the original market price, due to price fixing. This creates a imbalance in the consumer and producer surplus, as the consumer surplus decreases, and the producer surplus increases.

To prevent this scenario, the CAB carefully restrained and regulated the market for domestic air travel. Air travel lacks close substitutes in other transportation industries giving it high inelasticity and its consumers susceptibility, with its prime feature being convenience. Therefore, it had to be managed like a “public utility”. To protect this factor, the CAB had to step in to ensure affordability (‘fares’), accessibility (‘routes’) and availability (‘schedule’).

However, excessive checks and balances made introducing any changes a tedious legal procedure, discouraging research and development. Possibly resulting from this, the Airline Deregulation Act came into the picture. Reducing interference of civil authorities allows airlines to behave competitively, allowing demand and supply to adjust and settle at an equilibrium price in the long term, which would strike the balance between feasibility and profitability.

Instead, airlines began to consolidate, which refers to the amalgamation of smaller companies into larger companies. These larger companies benefited from extensive economies of scale, and their lower average costs allowed them to slash their price to a level that would drive the smaller firms into bankruptcy. Consumers will suffer, because at an hour of urgency, if the need for air travel arises, they have no choice but to accept being exploited. An advantage could be price stability, and increased funding towards research and development, but if this comes at the cost of exploitation to society, it is counterintuitive.

Article –

http://www.investopedia.com/ask/answers/011215/airline-industry-oligopoly-state.aspI

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