Reflection on Open Skies Policy: Where are the benefits?

The Open Skies agreement that came into force in 1997 promised us (consumers) an increase in competition which would drive prices down and challenge the established carriers on routes. Foolishly, we expected a surge of new airlines that would operate on the US-UK routes. We were promised a better quality product at a substantially lower price. 15 years later, I must confess: I see little change. When the agreement came into the effect, we indeed had the emergence of new low-cost long haul carries such as EOS or SkyJet that offered an all premium service for not-so premium prices. The UKs international hubs such as Gatwick and Heathrow saw the arrival of new US and European carriers. Following simple economic theory, an increase in market supply was supposed to reduce prices for tickets. It did! However, the major carriers adopted aggressive techniques to retain their market share. It's not surprising that ZOOM airliners along with EOS and SkyJet went into bankruptcy soon after commencing their services. The orthodox carriers charged prices below that of the marginal cost as their significant scale allowed them to recoup their costs. They purchased take-off/landing slots to create a capacity barrier. A sudden surge in demand for these slots drove their prices up to levels that could only be afforded by large airlines.

Let me us an example to illustrate the result of such tactics. I was hoping to book a flight to New York this Christmas at an affordable price. Prior to making a booking, I searched what carriers operate the London-New York route. To my surprise, there were only 5 airlines. Looking up prices, I was shocked. The minimum price for a return Economy Class ticket was £1200. It appears to me that all benefits from an OpenSkies agreement had insofar been limited. We now have a market whereby unconventional competition has been removed and it resembles highly a structure that is costly to the consumer. I am in favour of OpenSkies agreement but I think the government must monitor the actions of major players in the industry with more vigilance and foster start-ups such as ZOOM UK. 

"The Armchair Economist" By Steven Landsburg

In ‘The Armchair Economist’ Steven Landsburg applies a variety of basic economic principles and reasoning to human behavior. 

A chapter that particularly intrigued me was chapter 16, as Landsburg investigates into why popcorn costs so much at the cinema.  With my basic knowledge of economics, I assumed that if cinemas charged less for popcorn demand would increase.  However, I thought that the reason cinemas do not decrease the price of popcorn is because once you have entered the cinema; the cinema owner has a monopoly.   

In comparison, Landsburg illustrates that the owners’ monopoly is not the reason why popcorn prices are so high.  He states “Once you enter the theatre, the owner has a monopoly on a lot of things. He is the only supplier of rest rooms, for example. Why doesn't he charge you a monopoly price to use the rest room?[…] The answer, of course, is that a rest room fee would make the theater less attractive to moviegoers. To maintain his clientele, the owner would be forced to sell tickets at a lower price. What he collected at the rest room door would be lost at the box office”. 

Instead, Landsburg explains that popcorn is a secondary product, whereas the ticket is a primary product.  ‘Popcorn lovers’ are likely to be relatively price insensitive as they associate popcorn as being a necessity when visiting the cinema.  They are therefore likely to purchase popcorn regardless of the price.  Charging high prices for popcorn enables the cinema owner to keep his ticket prices below customers’ “reservation price”.  Allowing price sensitive customers to go to the cinema.  Contrary to my original opinion I have now realized that it is unlikely that cinema owners will reduce popcorn prices.

Overall, I really enjoyed reading ‘The Armchair Economist’ and would recommend it to anyone else interested in behavioral economics or anyone intrigued by the way economists see the world, as Landsburg covers many other interesting topics such as ‘Why do seatbelts cause accidents’ and ‘Why do they charge $35 for rock concerts when they know it could sell out at $50’.