The airline merger

Commentary this morning on the DOJ's challenge to the US Air-American Airlines merger has been economically illiterate. The assumption journalists make is that if airline mergers were approved before, this one should be too. But conditions are not the same.

The airline industry faces strongly pro-cyclical demand. The price elasticity of demand is quite high for the industry as well as for individual firms. Fixed costs are high, and marginal costs are low. There are substantial entry barriers, mostly in the form of limited airport capacity. For the last 30 years or so, these conditions have meant that when the economy was weak, airlines would get into very severe price wars, and most of the firms would lose money. Bankruptcies and mergers were very common. The industry was in serious trouble, and the government was hard-pressed to come up with a solution. From the 1930s until the early 1980s the industry was regulated like a public utility, but nobody wanted to go back to that situation. Industry executives tried to engineer a system of coordinated prices, but when this became public, there was too much outrage to sustain the effort.

In the last few years, the situation has changed. The number of competitors in the industry has been reduced. The industry culture has changed, away from rivalry and price wars. New ways have been found to extract revenue from the customers, using sophisticated price discrimination and piling up ancillary fees. Capacity has been systematically reduced. The new situation has meant that the industry has remained profitable even in the weak economy of the last few years.

Under these conditions, a further concentration of the industry is unnecessary, and indeed is likely to prove harmful to the interests of customers. (And remember, most of the customers are businesses, not consumers traveling for leisure.) DOJ is clearly justified in asking that this merger be rejected.

The Vienna-Chicago nexus

There is an excellent article by Corey Robin in the May 27 issue of The Nation on the roots of Austrian School economics in Menger and Hayek, and how it differs from the utilitarian philosophy of the English marginalists like Jevons. It helps clarify for me some of the puzzles about the differences between Austrian and Chicago economics, and the turn in American conservatism toward the Austrian view. Chicago-style economists believe in efficiency, and hence in equal opportunity. They are therefore unlikely to oppose the estate tax, and for a long time it was not an issue for conservatives. Hayek and other Austrians, on the other hand, did oppose the estate tax, because for them the heroic visionary, the entrepreneur or artist, is the figure to be encouraged and rewarded, the figure whom the economy is designed to serve. Hayek, Schumpeter and other Austrians believed that such a person is likely to come from an established aristocracy, not the common workers. This perspective has its roots in the thinking of another Austrian, Nietzsche. It is also reminiscent of the novels of Ayn Rand, which are enjoying a new popularity in this country.

In the U.S., the conservatives have become very adept at de-emphasizing such differences in philosophy and outlook, for the sake of achieving political victories. However, Robin's piece makes it clear that there are some very important issues here. They are not only essential to understanding the recent history of the conservative movement in the U.S., but also understanding where it might be trying to take us. It is not a utilitarian vision in the Chicago mode, but neither is it truly libertarian. In this new Austrian vision, conservative economics is turning away from the goals of equality of opportunity, of prosperity that is broadly shared, and of a democratic polity in which all are invited to participate, regardless of wealth or class.