Blanket Competition

by Elaine Schwartz    •    Feb 12, 2010    •    750 Views

Hearing that American Airlines was charging eight dollars for a blanket and pillow brought back memories of airline deregulation, Eastern Airlines, and People Express.

Does anyone remember the Eastern Shuttle? With a government given monopoly on flights between LaGuardia and Washington, D.C., Eastern guaranteed fliers a seat on every flight. You could arrive at the airport with minutes to spare and know that Eastern would roll out a new plane if the scheduled flight was full. Because fares corresponded to costs, Eastern made money.

In 1978 everything changed. With government no longer mandating interstate routes, competition surfaced and all airlines, including Eastern, had to change their behavior. Suddenly, someone else (New York Air) was charging a lower fare and advertising. They had to respond.
Charging lower fares meant consumer choice. You could fly more expensively or take the “no frills” airline (People Express) and pay extra for everything, even food.

Smiling, commentators are predicting what might be next.

The Economic Life
The market structure in which a firm competes shapes its behavior. As a monopoly, firms are price makers. They have considerable control over how to generate profits. At the other end of the competition continuum, perfectly competitive firms such as wheat farmers have their prices established through demand and supply in the marketplace. They have little power. With deregulation, the power of firms such as Eastern Airlines changed considerably.

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