ABSTRACT
In the period up to the late 1970s economists had justified the tight regulation of both international and domestic air services on several grounds. In the United States the Civil Aeronautics Act of 1938 had been 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 US view was that, while air transport is not a natural monopoly, regulation was required because ‘unregulated competitive market forces may have adverse consequences for the public at large’ (Richmond, 1971). The same philosophy had been widely adopted to justify the regulation of international air transport as well. It was argued that, whereas there were strong oligopolistic tendencies in air transport, the absence of any regulation of market entry would inevitably lead to wasteful competition. This is because the industry has a non-differentiated product and relative ease of entry. At the same time economies of scale are not very marked, so small new entrant airlines would not be disadvantaged when operating against much larger incumbents. The latter would not have lower costs merely because of their size. On the other hand, new entrants in a particular market would try to establish themselves by undercutting existing fares, and a price war would result, with adverse consequences for all participants.
