One of my core principles here at theVPO is:
There is no such thing as a “free market”
This is my response to conservatives who natter about how the “free market” will fix anything, from health care costs to poverty to global warming. It might be true in the pages of Ayn Rand, but nowhere else.
I’ll get to my reasoning in a while. But first, a People’s Exhibit to present, courtesy of those pinko fellow-travelers at The Economist.
In the January 23,2016 issue, there’s an article about the effect of low-low oil prices on airfares. The surprising conclusion: don’t expect any bargains in the Unfriendly Skies. This is true despite the fact that domestic carriers are raking in the dough.
On January 19th Delta kicked off the results season for the airlines, announcing record fourth-quarter profits and forecasting that first-quarter margins in 2016 would be twice as high as in 2015. Analysts also expect its rivals to report bumper earnings for the most recent quarter.
Prices went up when oil shot through the roof. Why aren’t they coming down now?
The Economist has a very good explanation. And it has to do with the small number of major competitors and the influence of high-rolling investors: “America’s five biggest fund managers happen to be among the largest shareholders in each of the big four airlines.” (That’s Southwest, American, Delta, and United.)
And there’s evidence to support the inference.
In a paper published in April José Azar, an economist, and two co-authors looked at the data and concluded that this common ownership means ticket prices may be up to 11% higher than they would otherwise be. Mr Azar was the lead author of another study, published this month, which found similar effects from overlapping shareholders in American banks.
Wonderful. The biggest investors wield so much clout that they can keep consumer prices artificially high, which in turn keeps their dividends artificially high.
Contrast this situation with Europe where there are multiple budget carriers keeping prices low and, The Economist reports,
The overlap among institutional shareholders in all these carriers is much smaller than in America.
Let’s hear it for supersized capitalism.
Which gets me back to “no such thing as a free market.”
The fundamental purpose of a business is not to make widgets or sell insurance or crank out burgers. Also, the purpose of a business is NOT to make the best possible product or service. The real purpose of every business is to make money and sustain its existence.
Businesses of all kinds will, with rare exceptions, try to get bigger and try to gain more control of their destiny. This means making a better product or service when possible, but that’s not a sure thing. Which is why it also means muscling out (or buying) the competition. It means seeking monopoly control of a market or portions thereof. It means making deals with competitors to share control and keep prices high. It means limiting one’s exposure to competitive pressures by any means necessary.
There’s the real truth: the business world pays lip service to competition and free markets, but in actual fact every business would kill its competitors and escape the uncertainty of free competition if it had the power. (And it would do everything it could to marshal the power of government in its own interests, which leads to another maxim: “No one really wants small government.” But that’s a story for another day.)
In the case of domestic airlines, it means creating an oligopoly. And it means deep-pocketed investors using their influence to rig the game.