Allocative Inefficiency in the Airline Industry: A Case for Deregulation

Abstract

During the 1970s and early 1980s, the U.S. airline industry underwent substantial changes—the two most important of which were the accelerated rate of increase in energy prices and the Air Deregulation Act of 1978. Supporters of deregulation argued, among other things, that a new economic climate would enhance the ability of the airlines to adjust to changes in the economic environment on both the supply and demand side, to operate in an efficient fashion, and to provide for a competitive environment that would reduce monopoly profits. An implicit presumption in these arguments was that inefficiencies of one sort or another existed prior to deregulation.

Funding for this research was supported by NSF grant DAR 80-12982. An earlier draft of this chapter was presented at the Conference on Current Issues in Productivity at Rutgers The State University of New Jersey.