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Pricing Airline Tickets

by Elaine Schwartz    •    Aug 27, 2010

During the 1970s, a ticket to fly between New York and Washington, D.C. cost $50 whereas one between Los Angeles and San Francisco-almost twice the distance-cost only $40. 

Why?

Before deregulation in 1978, the interstate airline industry was subject to extensive regulatory control from the Civil Aeronautics Board (CAB).  For interstate travel, the CAB had to approve an airline’s decision to add or delete a route or to change a fare. Preserving profitability and service to large and small cities were government priorities. However, for intrastate travel, the market determined the price. As a result, intrastate flying tended to be cheaper.

Fast forward to 2010. With government primarily regulating safety, the market shapes most other airline decisions.  According to the Wall Street Journal, four variables affect airline ticket pricing: 1) Competition from low-cost carriers for a specific route (When Southwest selects your route, fares drop.) 2) The number of carriers in the market for a specific route (More carriers…lower fares) 3) Whether passengers are discretionary or business travelers 4) Operating costs that would include landing fees and other airport expenses.

The Economic Lesson

A competitive market structure shapes a firm’s behavior. When government ran the industry, firms tended to behave like monopolies They had guaranteed profits, behaved inefficiently, and charged high prices.

Now, with the market in charge, different routes have different market structures. When several airlines compete, and especially if one of those airlines is a discount carrier, fares tend to decrease. By contrast when the market is an oligopoly or one firm dominates, fares rise because the firm has more power. 

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