MBA 211 Game Theory

Airline Deregulation: The Wisdom of the Market?

It seems to me that airline deregulation in the US has gone terribly wrong. Once upon a time, the government regulated airline fares much as they do with power or water utilities. This ensured a steady flow of profits to airlines like Pan Am and little in the way of competition. What competition there was came not in price but in service. Maybe the most ludicrous example is when one airline, Pan Am I believe, insisted that their flight attendants (all female and young at that time) were made to wear outfits made entirely out of paper. Needless to say, the men flying (think Don Draper of Mad Men) took advantage of this particular amenity.
Then came price deregulation. Suddenly, there was enormous competition among the airlines. Prices fell dramatically and normal people, Bubba and his wife Flo, could fly across the country. This was justly celebrated as a smart government decision. And so it remained for many years. Paper outfits disappeared, as did decent meals, and legroom. Airlines tanked--TWA, Pan Am, Eastern, etc.--but prices remained low and service declined, but still remained a point of competition.
And then came 9/11. This was a single biggest disaster airlines had ever experienced. They all turned unprofitable, and it appeared that the US airline business would never be the same. As a consequence, the GW Bush administration (and Obama too) followed a practice of allowing a massive amount of industry consolidation. The surviving airlines gained ever more market power and were granted ever more liberal pricing rights as a result. Ironically, 9/11 might have been the BEST thing to ever happen to airlines in the long run.
The rationale given to embrace each merger was "market forces." Indeed, the GW Bush administration was a great believer in market forces. But they appear to only have taken intro econ and not intermediate econ. Intro econ describes a model of perfect competition. It's main thesis is that the best government strategy is to leave markets alone. Intermediate econ adds the prospect of imperfect competition---competition where firms exercise market power at the expense of consumers. Here government regulation can be helpful.
Sadly, the GOP, then and now, seems to have only taken the intro course. And hence we see a passenger on United bodily dragged off his flight bloody and limp. Under perfect competition, this would be a disaster for United. People would desert it in droves for rivals.
..except there are no rivals. If you fly out of SFO, United is pretty much the only game in town. And that is the nature of imperfect competition. United is very profitable and need not really worry about consumer backlash since, in most places, even a big place like SFO, there are few choices.
Ironically, we seem to have returned to the era of regulation, except that the airlines themselves are the regulators.
There is a broader lesson to GOP leaders imbibing the gospel of free markets--free markets are good so long as they are competitive. But there are incentives for firms to consolidate and make the market less and less competitive. Giving firms a free hand at this is not "improving competition in the marketplace", it is fostering oligopoly and firm profits at consumer expense. It is getting all of the disadvantages of regulation with none of the (meager) benefits.
So the next time someone champions a merger as the process of an "efficient market," counter this argument with a question as to whether the improvements are primarily from efficiency gains passed on to consumers via competition, or market power gains used to squeeze consumers, like the poor doctor on the United flight.

Game Theory Online
Starting last spring, I have moved game theory to a fully online course. This is mainly for health reasons. As many of you know, I'm in dreadful pain much of the time and movement exacerbates this. Many of you will also recall just how much moving I did while teaching--I cannot really help myself.

The online course is easier this way. Better yet, it also offers anyone interested a chance to sample Game Theory again, even after graduation, for the low, low price of zero dollars. At present, we are nearing the end of OPEC. The debriefs will occur from 6-730 on Tues and Weds of this week.

My Tuesday class has plenty of empty virtual seats, so please feel free to join in. Email me anytime you want to visit, and I'll arrange everything.

When I said that my commitment to you was for a lifetime, I meant it. The online format allows me to keep that promise not just in terms of the course materials, but also in terms of class visits.

Better yet, I'll give you the traditional shout-out we give to all visitors, if you'll recall. I recently heard from Annie Lei, a game theory alum interested in visiting if I pull off my ask to Milo Yiannopoulos.I don't agree with most of his views, and find his comments in favor of pederasty pretty despicable, but I won't deny his right to free speech.

Since I think his most recent set of issues, those that forced him to resign from Breitbart, offer a host of game theory insights, I've written him an open letter to visit my class (virtually) or, if he dislikes the classroom, to speak in a virtual auditorium which he and I will fill with guests. I made a similar offer to Scott Adams, who spurned me.

At any rate, if this is of interest, or just a visit to game theory is of interest, let me know, and I'll have my engineers give you the coordinates.