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Airline Fees

Jun 25, 2011 • Businesses, Demand, Supply, and Markets, Financial Markets, Government, Households, Labor, Money and Monetary Policy • 433 Views    No Comments

Weigh baggage, tag it, and place it on the conveyor belt. No you are not an airline employee. You are flying the Australian Airline, Jetstar. Any human interaction will cost you. A question about your baggage? $10.

Soon, all U.S. air carriers will be required to list their fees. On its website, Ryanair tells us that it charges for lap babies, baggage, name changes, sports equipment, priority boarding. They also charge for printing a boarding pass. Other airlines have us pay extra for legroom, snacks, and booking by phone.

The Economic Lesson

The airline industry can tell us a lot about how competitive market structure shapes a firm’s behavior. Before 1978 deregulation, airlines enjoyed government oversight that gave fliers high fares, labor high wages, firms were profitable and competition on interstate routes was minimal.

The incentives changed after deregulation. Less government and more competition meant lower fares. How then to generate more profits? Fees are the current answer. Up by $22 billion, fees represent a huge source of airline revenue.

An Economic Question: Picture a market structure continuum. Perfectly competitive small firms selling similar products are on one end, then monopolistically competitive firms, next oligopolies, and finally, monopoly. On this scale, where would you place the airline industry before deregulation in 1978? After?

 

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