During the past decade and more, deregulation--the loosening or abolition of government regulation on business activity--has been a major trend of American national economic policy. While popularly associated with the "Reagan era," the trend towards deregulation actually caught on during the middle and later 1970s; airline deregulation, for example, occurred in substantial measure in 1978 (Kasper, 1988). Its intellectual roots in modern times go back to Milton Friedman's Capitalism and Freedom (1962).
This essay examines the experience of airlines deregulation from 1978 to the present as a microcosm of the interaction of a real-world industry and the practice of government regulation. The area of most sweeping deregulation in the late 1970s and 1980s was in economic regulation in the narrow sense; that is, deregulation of restrictions on lines of business or territories which formerly regulated business could enter.
Traditionally, transportation industries (beginning with the railroads) were among the most subjected to government regulation of this type, as well as to operating and safety regulations, which generally have not been officially relaxed (though enforcement has often dwindled). Transportation systems were widely felt to be "technical monopolies;" moreover, control over transportation offered exceptional power, and such power in private hands seemed an apt object of governmental regulation. Thus, airlines were tightly regulated in the fares they could charge and the routes they could fly.
By the middle 1970s, a thorough theoretical critique of the impact of price and route regulation had been developed (Douglas and Miller, 1974). Theory was borne out by the practical experience of several intrastate airlines that flew important routes, such as California's PSA and the original Texas Air. These intrastate carriers were exempt from interstate commerce regulations, and they consistently offered fares about 30...