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Market Competition Is a Process of Creativity and Discovery

David Henderson has an excellent post at EconLog in which he references a new essay of his at Defining Ideas. The topic is antitrust and the mix of arrogance and economic ignorance that motivates today’s antitrust ‘enforcers’ and their cheerleaders.

In the comments section of David’s EconLog post, “steve” writes:

Is there really a market here [in the U.S.] for Ryanair? If you google it you find out that the US has had thousands of airlines that have gone out of business, at least 5 this year so far. We still have many, many airlines. We still have at least 10, assuming I counted correctly, with over $1 billion in revenues. How many more airlines do we need? There is a history of many failed attempts at cheap, no-frills airlines in the US. We have many airlines already that could compete if they wanted but it would mean cutting staff and eliminating rewards programs. Using out of the way hubs.

David Henderson responded nicely:

You ask:

Is there really a market here for Ryanair?

I think there is. But there’s an easy way to find out: open the market to foreign competitors. They often have lower costs than U.S. companies.

It’s important, Steve, not to be a central planner, deciding, based on what you think you know, what the structure of an industry should be.

You ask:

How many more airlines do we need?

I don’t know the answer; neither do you. So again, open the market and find out.

David’s response then prompted this reply from steve:

Fine with me. It just seems unlikely that since we currently have 58 passenger airlines, per expert I read today, that the 59th would make a difference.

steve’s reply drew an appropriate comment from GMU Econ alum Jon Murphy. steve’s comment also drew this comment from me:

“Airlines” is not a category of homogeneous companies. While it’s true that even if each and every airline were identical to the others there’s no way, absent actual market competition, to determine whether or not additional airlines are worthwhile, the more important fact is that an additional airline might well – indeed, likely will – differ from existing airlines in an important way or ways.

Perhaps the new airline is managed by executives who are better than any others at cutting costs without cutting service. Perhaps the new airline will configure seating for passengers in a new manner that no other airline has thought of. Perhaps the new airline will offer an innovative, new experience for passengers waiting at its gates to board its flights. Perhaps the new airline will entrepreneurially integrate with rental-car companies and hotels in ways that please consumers but that the executives of existing airlines would never think to do. Perhaps the new airline will have a website that’s better than that of any existing airline. The length of the list of these “perhaps”-es is limited only by one’s entrepreneurial imagination.

In the case of airlines, an unusually large number of government-imposed rules artificially restrict the range of entrepreneurial experimentation open to airlines. Nevertheless, airlines are far from homogeneous, cookie-cutter-produced companies – and there are surely several legally permitted innovations that existing airlines will never think of and which, if we are to have any hope of trying out and testing in the market, require the ability of the 59th or 159th airline to enter in competition for consumers’ dollars.

Another point is worth making: If (contrary to fact) all airlines are homogeneous to each other, if private investors are willing to back the entry of a new airline, then they obviously believe that at least one more airline, doing what existing airlines are doing, is justified. Perhaps these investors will be proven wrong and steve proven right. But notice that steve is merely talking idly, without skin in the game (as is done by politicians, bureaucrats, and pundits), while the investors are putting their money where their mouths are.  Alternatively, If (as is true) airlines are not homogenous to each other, if private investors are willing to back the entry of a new airline, then they obviously believe either that at least one new airline doing pretty much what other airlines are doing is justified or that a new airline doing something different from what other airlines is doing is justified. Either way, existing airlines won’t welcome the new entrant and – count on it – will pressure regulators to block it.

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