In response to my brief post yesterday, a correspondent points out that DOJ has, in fact, made allegations that hinged on system-wide competition in at least one case in the past.
In its trial brief in the case challenging Northwest’s acquisition of Continental way back in 2000, DOJ argued that the combination would hinder system-wide competition by facilitating coordination on system-wide prices. DOJ noted several instances in which one of the major airlines had announced a system-wide price increase only to rescind the increase after one or more of the other majors decided not to follow. Even better, each of the merger parties had recently been the maverick who thwarted an attempted system-wide price increase at the time of the case. Combining them into one entity would therefore have eliminated one potential objector and made the imposition of coordinated system-wide price increases easier.
Apparently I don’t pay enough attention to the airline industry, as I was about to express skepticism about the ongoing significance of system-wide price increase announcements in a world of computerized dynamic pricing (i.e., ticket prices that fluctuate based on analysis of individual flight loads). But it didn’t take much effort at searching to find quite recent discussion of a price increase announcement. The continued existence of such stories may be reason enough for DOJ to continue to be concerned about coordination. Whether effective or logical, perhaps the airlines are trying to use such announcements to coordinate.
Regardless, we can be certain that as we speak (or whatever we are doing), economists for the Department of Justice are crunching numbers about the effectiveness of such announcements and whether they have lead to higher prices. I’d bet the advisers for the parties are ready with explanations for why they have not.
DOJ’s opposition to summary judgment in the NWA/Continental case raised another aspect of system-wide competition that might also be reduced: competition on quality and service. There will be one less player trying to capture loyal customers by improving service (no, the notion of airline service improving instead of eroding wasn’t meant as a joke). That may be, although one can see how a start up or foreign carrier can still spur some quality competition if they are able to successfully offer features or levels of service that attract passengers. Adopting those practices still offers the chance to win customers from the other major carriers.
Regardless, while looking back at briefing that is now more than a decade old gives us some insight into how DOJ might approach a network- or system-based case, I remain skeptical that it would persist on these theories if there was a remedy in place to restore competition for individual city pairs and/or gate slots.