RE: Consumer Reports on Deregulation
In the recent PBS series Commanding Heights Alfred Kahn pointed out that when he took over as head of the CAB, the largest division within the agency was the enforcement division, making sure that prices were no too low. He also said the agency was measuring the size of sandwiches to make sure they weren't too big. On Wed, 12 Jun 2002 [EMAIL PROTECTED] wrote: On Bill's pint about quality competition. I've heard that during the days of regulated air travel, airlines apparently competed on the beauty of the stewardesses. I've been told by numerous sourcces (but have no real evidence) that some business magazines would rate the quality of the stewardesses in each airline. If you favor hiring people based on their ability to serve coffee and tea instead of their looks, you might favor deregulation. mitch mitchell - Original Message - From: William Dickens [EMAIL PROTECTED] Date: Monday, June 10, 2002 5:08 pm Subject: RE: Consumer Reports on Deregulation Also relevant is quality and availability of service. Previously pricesmay have been cheap/falling but the range of offering, customer treatment or availability may have constrained enjoyment of the serviceto a sub optimal level. Deregulation could/should change this. (I think it has in my limited experience) Exactly the opposite of what happened in the formerly regulated markets I'm familiar with. With prices fixed at a level that gave most good companies very good rates of return they competed by increasing quality. Quality has declined most noticeably in air travel and the brokerage industry, but arguably in trucking and banking as well. I'm also not sure to what extent the prices charged were also controlledby governments as a macroeconomic tool to reduce measures of inflation? Any thoughts? Since the regulatory agencies tended to be captured by the regulated industry (or at least sympathetic) prices tended to be too high (thus the price declines) rather than too low. As someone else said, the counterfactual is everything. CR is comparing the price declines during the 50s, 60s and early 70s with the price declines in the late 70s, and 80s. Productivity growth was notably faster in the earlier period than the later period. Would prices have declined as much in the 80s in trucking airlines, and phone service if there hadn't been deregulation? From the studies I've seen I seriously doubt it. Of course not everybody's prices decline. Regulation did tend to set prices too low for many low volume markets. In those places prices have skyrocketed. I suspect that some of this is just price rising to meet marginal cost, but because these are also markets with substantial fixed costs (maintaining terminals, ticket agents etc.) there is probably also some element of natural monopoly pushing prices in these markets up above long-run marginal cost. I would guess that there are three factors that account for CR's anguish about deregulation: 1) Their sense of fairness is offended by the big price increases experienced in difficult to serve markets, 2) Coming from the upper middle class as they do, they put more value on quality and are less concerned about price than the marginal air traveler/bank customer/brokerage customer so they experience the change from high q high p to low q low p less favorably than the new people attracted to the market by the change, and 3) deregulating a monopoly may cause an increase in price and to some extent that is what deregulation did (perhaps most notably in the cable industry, small air markets, and certain types of phone service). With respect to 3) don't think I'm not aware of the competition that cable faces from satellite or how contestable air markets are. Imperfect competition and limit pricing still leave plenty of room for monopolistic distortion. I don't think that _the_ definitive study on the costs and benefits of deregulation has been done and I very much doubt that CR's study is it. After all, CR used to (still does?) insist that economists have to be wrong about the predictability of capital markets because there are numerous mutual funds that have had 5 or more years of ROR above the market average - - without asking how many would be expected on the basis of chance alone. Thus they used to endorse mutual funds with exceptional records which, of course, tend to be the ones with the riskiest strategies (and by the studies I've seen only infinitesimally better expected returns). Sigh... - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens Art Woolf Phone: (802) 656-4711 Vermont
RE: Consumer Reports on Deregulation
Huh? Why would the _nature_ of quality competition be affected by deregulation? I suspect that it is true that competition was on the basis of both quality of service and attractiveness of flight attendants back in the 60s and 70s, but it was the women's movement, the Civil Rights act (particularly its application to age discrimination) and the flight attendants' union that changed this. Not deregulation. But there is a lot more to quality competition than flight attendants. In flight meals were more substantial and more frequent. Ticket lines were shorter for coach passengers. Major airline employees were more polite. There were lots of give always (decks of cards, airline pins, etc.) Flight attendants with time on their hands would strike up conversations with passengers. I don't know that anyone has tried to quantify this, but I don't know anyone who flew much before deregulation who doesn't think that the quality of service with the major airlines declined before and after deregulation. Given that deregulation seems to have caused fairs to drop in the major markets this is exactly what an economist would expect. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens [EMAIL PROTECTED] 06/12/02 09:45PM On Bill's pint about quality competition. I've heard that during the days of regulated air travel, airlines apparently competed on the beauty of the stewardesses. I've been told by numerous sourcces (but have no real evidence) that some business magazines would rate the quality of the stewardesses in each airline. If you favor hiring people based on their ability to serve coffee and tea instead of their looks, you might favor deregulation. mitch mitchell - Original Message - From: William Dickens [EMAIL PROTECTED] Date: Monday, June 10, 2002 5:08 pm Subject: RE: Consumer Reports on Deregulation Also relevant is quality and availability of service. Previously pricesmay have been cheap/falling but the range of offering, customer treatment or availability may have constrained enjoyment of the serviceto a sub optimal level. Deregulation could/should change this. (I think it has in my limited experience) Exactly the opposite of what happened in the formerly regulated markets I'm familiar with. With prices fixed at a level that gave most good companies very good rates of return they competed by increasing quality. Quality has declined most noticeably in air travel and the brokerage industry, but arguably in trucking and banking as well. I'm also not sure to what extent the prices charged were also controlledby governments as a macroeconomic tool to reduce measures of inflation? Any thoughts? Since the regulatory agencies tended to be captured by the regulated industry (or at least sympathetic) prices tended to be too high (thus the price declines) rather than too low. As someone else said, the counterfactual is everything. CR is comparing the price declines during the 50s, 60s and early 70s with the price declines in the late 70s, and 80s. Productivity growth was notably faster in the earlier period than the later period. Would prices have declined as much in the 80s in trucking airlines, and phone service if there hadn't been deregulation? From the studies I've seen I seriously doubt it. Of course not everybody's prices decline. Regulation did tend to set prices too low for many low volume markets. In those places prices have skyrocketed. I suspect that some of this is just price rising to meet marginal cost, but because these are also markets with substantial fixed costs (maintaining terminals, ticket agents etc.) there is probably also some element of natural monopoly pushing prices in these markets up above long-run marginal cost. I would guess that there are three factors that account for CR's anguish about deregulation: 1) Their sense of fairness is offended by the big price increases experienced in difficult to serve markets, 2) Coming from the upper middle class as they do, they put more value on quality and are less concerned about price than the marginal air traveler/bank customer/brokerage customer so they experience the change from high q high p to low q low p less favorably than the new people attracted to the market by the change, and 3) deregulating a monopoly may cause an increase in price and to some extent that is what deregulation did (perhaps most notably in the cable industry, small air markets, and certain types of phone service). With respect to 3) don't think I'm not aware of the competition that cable faces from satellite or how contestable air markets are. Imperfect competition and limit pricing still leave plenty of room for monopolistic distortion. I don't think that _the_ definitive study on the
Re: Consumer Reports on Deregulation
Bill notes that prior to deregulation In flight meals were more substantial and more frequent. Ticket lines were shorter for coach passengers. Major airline employees were more polite. There were lots of give always (decks of cards, airline pins, etc.) Flight attendants with time on their hands would strike up conversations with passengers. I don't know that anyone has tried to quantify this... I bet there is something in the literature but if not quantifying quality changes would be a nice project for a bright student. First place that I would look is passengers per airplane, i.e. seat room. Alex -- Dr. Alexander Tabarrok Vice President and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621-1428 Tel. 510-632-1366, FAX: 510-568-6040 Email: [EMAIL PROTECTED]
