ABSTRACT
Traditionally, economists have justified the regulation of both international and domestic air services on one or more of three grounds. In the United States the Civil Aeronautics Act of 1938 was introduced to regulate and control competition between US domestic carriers because the unregulated competition which had prevailed up to then had led to chaotic economic conditions, little security for investors and low safety margins. For many years the American view was that, while air transport is not a natural monopoly, regulation is required because ‘unregulated competitive market forces may have adverse consequences for the public at large’ (Richmond, 1971). The same philosophy has been widely adopted to justify the regulation of international air transport as well. It has been argued that, whereas there are strong oligopolistic tendencies in air transport, absence of any regulation would inevitably lead to wasteful competition. This is because the industry has a non-differentiated product and a relative ease of entry. At the same time, economies of scale are not very marked. New entrants into a particular market would try to establish themselves by undercutting existing fares, and a price war would result with adverse consequences for all participants (Wheatcroft, 1964).
