2.7.15

THE CRITICAL LEVEL OF CONCENTRATION.

Four airlines control 80% of the U.S. market, notes the Milwaukee Journal-Sentinel, and the Justice Department is looking for winks and nods or a puff of smoke.
The U.S. government is investigating possible collusion among major airlines to limit available seats, which keeps airfares high.

Seating and fares are closely intertwined, because companies lose pricing power when the industry's capacity outstrips travel demand.

The civil antitrust investigation by the Justice Department appears to focus on whether airlines illegally signaled to each other how quickly they would add new flights, routes and extra seats.

A letter received Tuesday by major U.S. carriers demands copies of all communications the airlines had with each other, Wall Street analysts and major shareholders about their plans for passenger-carrying capacity, or "the undesirability of your company or any other airline increasing capacity."

The Justice Department asked each airline for its passenger-carrying capacity both by region, and overall, since January 2010.

Justice Department spokeswoman Emily Pierce confirmed that the department is looking into potential "unlawful coordination" among some airlines. She declined to comment further or say which airlines are being investigated.
At American Thinker, Thomas Lifson suggests, too little, too late.
Faced with an American public fed up with cattle-car dense seating, extra fees for checked baggage, and perceived poor service from overworked airline employees, the Department of Justice is launching an antitrust probe of the industry, complete with subpoenas.  This is likely to be fruitless, because the airline industry has been allowed to merge itself into an oligopoly that doesn’t need to illicitly coordinate in order to keep a lid on capacity.
In his view the competition authorities went a merger or three too far.
I mourn the loss of all the vanished names of the airline industry: Continental, Northwest, U.S. Airways, TWA, even Braniff (which flamed out in a misbegotten expansion) and even more ancient carriers like Northeast.  If the DoJ wanted a non-oligopolistic industry, it should have stopped the last round of mergers.  Looking for collusion now is like closing the barn door after the horses have left.
That's been a problem since the early days of deregulation.  I recall a presentation by Alfred Kahn in Madison, in the fall of 1978, in which after he finished his overview of the joys of being inflation czar for the Carter administration, he took a few questions about the airlines.  His answers included a lament about how the Civil Aeronautics Board had hoped that the airlines would go into the alley to fight, but they went there to, er, engage in heavy petting instead.

Airlines have sophisticated ridership-management systems and code sharing, and law professors Ariel Ezrachi and Maurice Stucke are contemplating how shared computer information will change conscious parallelism doctrine.  (That's an old expression, contemporary game theorists are more likely to refer to rational cooperation.)
We are shifting from the world where executives expressly collude in smoke-filled hotel rooms to a world where pricing algorithms continually monitor and adjust to each other’s prices and market data. We are leaving the antitrust ‘no brainer’ jurisprudence for one where the ethical and legal issues are unsettled. In this new world, there isn’t necessarily any collusive agreement among executives. Each firm may unilaterally adopt its own pricing algorithm, which sets its own price. In this new world, there isn’t necessarily anticompetitive intent. The executives cannot predict if, when, and for how long the industry-wide use of pricing-algorithms will lead to inflated prices. The danger here isn’t express collusion, but tacit collusion.

The use of advanced algorithms in this scenario transforms an oligopolistic market in which transparency is limited and therefore conscious parallelism cannot be sustained to a market susceptible to tacit collusion/conscious parallelism in which prices will rise. Importantly, price increases are not the result of express collusion but rather the natural outcome of tacit collusion. While the latter is not itself illegal–as it concerns rational reaction to market characteristics–one may ask whether its creation should give rise to antitrust intervention.

With the advancement of technological developments human involvement in setting up these machines will become limited, up to a point that such actions may be determined independently by smart, self-learning machines, which learn how to operate in the market through trial and error. A self-learning machine may find the optimal strategy is to enhance market transparency and thereby sustain conscious parallelism and foster price increases. Importantly, tacit coordination—when executed—is not the fruit of explicit human design but rather the outcome of evolution, self-learning and independent machine execution. Here pricing algorithms learn through experience to maximise profit. Such machines may promote a stable market environment in which they could predict each other’s reaction and dominant strategy. An industry-wide adoption of similar algorithms may foster interdependent action, conscious parallelism, and higher prices. Interestingly, the execution of tacit collusion via algorithms does not mark the end of the spectrum of possible antitrust infringements, as advanced computers may undermine competition through more subtle means. Importantly, without evidence of a human ‘agreement’ or ‘anticompetitive intent,’ the industry-wide use of pricing algorithms may evade antitrust scrutiny under current laws.
The dynamics spelled out above are precisely how rational cooperation becomes an evolutionary stable strategy.  The parallels with the evolution of cooperation or of privilege are straightforward.

The challenge ... and it is as old as price theory ... is in establishing a principle by which the rapid discovery of information, which is one of the sufficient conditions for competitive equilibrium, becomes a facilitating practice for a cooperative equilibrium.
Such technological developments raise thought-provoking legal and ethical challenges. For instance, the increased market transparency, which often enhances competition, may in such circumstances facilitate anticompetitive effects. Enforcers may find it difficult to fine-tune antitrust policy to condemn ‘excessive’ market transparency. This may be particularly challenging when the information and data are otherwise available to consumers and traders and it is the intelligent use of that information that leads to price increases. Importantly, such unilateral use of information, which may facilitate conscious parallelism,[2] is not illegal and does not infringe Section One of the Sherman Act. [3] In other words, under current law, competition agencies may find it difficult to challenge each firm’s unilateral decision to use sophisticated algorithms to analyse market information and determine prices, even if such use results in parallel price increases, to the detriment of consumers.
Perhaps the dominant strategy for each firm is to use such an algorithm. Perhaps the dominant strategy for each algorithm is to follow a tit-for-tat strategy in the pricing of buckets of seats.  And thus rational cooperation evolves in repeated interaction.  But consumers get screwed.

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