The Economics of Regulatory Reform: Termination of Airline Computer Reservation System Rules

Abstract

The Department of Transportation's announced plan to terminate all federal regulation of airline computer reservation systems (CRS) in 2004 is somewhat surprising in light of modern economic theories of regulation that highlight barriers to reform. This Article presents evidence on how CRS regulation affects the market for CRS services from the perspectives of both traditional and modern theories of regulation. We conclude that the announcement of a plan to terminate CRS regulations is consistent with traditional theories of regulation in which the government acts to maximize social welfare. We also demonstrate that the traditional approach to evaluating the merits of regulation, as sometimes applied, exhibits a bias toward rule retention by assuming that the relevant alternative to regulation is a state of laissez-faire. In fact, the relevant alternative is typically other forms of intervention by the government, such as antitrust enforcement, which poses as the government's strategic alternative for most if not all prior DOT regulation of CRS markets. Finally, we examine the practical relevance of modern theories of regulation for explaining the recent move towards deregulation. The occurrence of entry and technological change prior to CRS deregulation is of special interest from this perspective. The termination of CRS regulations is indeed consistent both with the traditional theory of deregulation in the public interest and with the modern interest group theory of deregulation in which deregulation is the ultimate conclusion of a process. Other modern theories of regulation appear not to explain the timing of reform in this instance.