Kjell G. Salvanes, Frode Steen and Lars Sørgard
According to conventional wisdom, deregulation can result in substantial benefits for society. The key word is, as we all know, competition. It can result in lower prices, and thereby force the firms to lower their costs. In a survey of the effects of deregulation of American industry, Winston (1993) concluded that ‘the evidence clearly shows that microeconomists’ predictions that deregulation would produce substantial benefits for Americans have been generally accurate’. However, the experience from the deregulation of the Norwegian airline industry differs from what we have seen in the United States. Deregulation also changed the conduct in this industry, but not exactly in the way we expected. Apart from some secret price cuts in exclusive dealing contracts between each carrier and some large customers, prices did not fall in the most important market segment, the business travellers segment. There was no substantial improvement in service frequency concerning time scheduling of flights, but rather a tendency of local clustering. The battle for market shares has resulted in intense rivalry along other dimensions than price, such as advertising, service and number of flights. On the other hand, the large number of flights has resulted in an increased number of seats available in the leisure travellers’ segment, where we have experienced lower prices.
In what follows, we will first describe the initial, pre-deregulation situation in this particular industry. Then we will explain the consequences of deregulation, focusing on the effect on prices, capacity and time-scheduling of flights. Finally, we summarize and discuss briefly how entry might affect the market outcome.
The largest routes in Norway are of almost equal size to the routes between many specific airports within Europe as well as within the United States. 1 Therefore, the experience in the Norwegian airline industry can be of interest for what may happen in airline industries in other countries. As in most countries, the Norwegian airline industry has been heavily regulated. For each route, one single