The Economics of Regulatory Reform: Termination of Airline Computer Reservation System Rules

By Alexander, Cindy R.; Lee, Yoon-Ho Alex | Yale Journal on Regulation, Summer 2004 | Go to article overview
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The Economics of Regulatory Reform: Termination of Airline Computer Reservation System Rules


Alexander, Cindy R., Lee, Yoon-Ho Alex, Yale Journal on Regulation


The Department of Transportation's announced plan to terminate all federal regulation of airline computer reservation systems (CRS) in 2004 is somewhat surprising in light of modern economic theories of regulation that highlight barriers to reform. This Article presents evidence on how CRS regulation affects the market for CRS services from the perspectives of both traditional and modern theories of regulation. We conclude that the announcement of a plan to terminate CRS regulations is consistent with traditional theories of regulation in which the government acts to maximize social welfare. We also demonstrate that the traditional approach to evaluating the merits of regulation, as sometimes applied, exhibits a bias toward rule retention by assuming that the relevant alternative to regulation is a state of laissez-faire. In fact, the relevant alternative is typically other forms of intervention by the government, such as antitrust enforcement, which poses as the government's strategic alternative for most if not all prior DOT regulation of CRS markets. Finally, we examine the practical relevance of modern theories of regulation for explaining the recent move towards deregulation. The occurrence of entry and technological change prior to CRS deregulation is of special interest from this perspective. The termination of CRS regulations is indeed consistent both with the traditional theory of deregulation in the public interest and with the modern interest group theory of deregulation in which deregulation is the ultimate conclusion of a process. Other modern theories of regulation appear not to explain the timing of reform in this instance.

Introduction

On December 31, 2003, the Department of Transportation (DOT) announced plans to terminate its regulations governing the market for the electronic distribution of tickets and flight information to travel agents.1 This would end, by July 2004, two decades of regulation governing the airline computer reservation system (CRS) industry. This Article reviews the economic merits of the DOT's plan of reform and offers an initial appraisal of how effectively traditional and modern economic theories of regulation explain the occurrence of deregulation in this instance. It also identifies a bias toward rule retention that is present in recent applications of traditional cost-benefit analysis of regulation. This bias occurs when the government's strategic commitment to intervene is not adequately taken into account.

CRSs are computer systems that contain and provide information about airline schedules, availability, fares, and other services.2 Travel agents can view this information and also make reservations or issue tickets directly through these systems. When the CRSs first appeared in the late 197Os, the sudden proliferation of routes and fares after the Airline Deregulation Act of 1978 made the conduct of a few CRS vendors appear critical to the success of an unregulated airline industry, which prompted the initial interest in CRS regulation.3 Twenty years later, the merits of terminating the CRS regulations might seem obvious in light of the changes in various market conditions. Nevertheless, the history of CRS regulation has been a history of delayed sunset, and some skepticism might naturally arise about whether CRS regulation will actually end in 2004.

The reform of airline CRS regulations is of general interest to students of the economics of regulation and its reform because regulations are terminated infrequently. Indeed, the modern literature on regulation focuses largely on the question of why regulations persist, rather than why they are terminated. That said, the history of delayed sunset of CRS rules has given rise to an extensive public record on the merits of CRS reform.

The past evaluations of CRS regulation have mainly followed two approaches. First, conventional legal articles have approached this question as a matter of law by critiquing current regulation on the grounds of jurisdiction4 and modern antitrust doctrines, such as the monopoly leveraging theory and the essential facility doctrine.

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