They say that in the airline business, your ticket prices are determined by your dumbest competitor. Why is this homily restricted to the airline industry? Isn't it also true of the bakery store business and the hardware store business and every other business under the capitalist system?


A difference between airlines and some other businesses is that airplanes are incredibly expensive. So a lot of the value of an airline is tied up in these extremely expensive assets. Also, you have to order new airplanes years in advance.

So suppose the dumbest airline has overspent on aircraft, and there aren’t enough passengers. In desperation the dumbest airline slashes prices to fill seats—what else is it going to do, leave its expensive planes sitting on the ground? And all the other airlines suffer.

Well, the dumbest airline goes broke anyway, and the CEO steps down. But here’s the thing: the airplanes are still there. So the dumbest airline goes on flying its planes under bankruptcy protection and/or new management. An evil zombie competitor.

I guess my theory in a nutshell is that to run an airline profitably, you have to set prices high enough to recoup the initial investment in the planes; but you can’t necessarily rely on the dumbest competitor to do that, instead of just covering its operating costs. This isn’t as much of a problem in the bakery business because the initial investment is not as large in relation to operating costs.

Another reason airlines could be special is that governments treat them as special. Lots of governments think their country needs a national airline and it can’t be allowed to fail. Again, this offers a certain subsidy for the stupid at the expense of the clever. But nobody’s going to waste good tax dollars on a national bakery or national hardware store.