TABLE OF CONTENTS For many years air transport was a closely regulated industry, both domestically and internationally. Government had a whole host of reasons why they were not prepared to leave the industry entirely to the forces of free and unfettered competition. This regulation versus competition debate spawned a large literature in the 1960s and 1970s (see Richmond, 1962; Caves, 1962; Wheatcroft, 1964; Levine, 1965; Kahn, 1970; Keeler, 1972; Douglas and Miller, 1974; and White, 1979). All that is presented in this section is some brief discussion of the fundamental issues involved.
Governments traditionally regarded air transport as, in some sense, a public utility. Strictly speaking, it is not. Economists prefer to reserve the term public utility to enterprises that have characteristics of natural monopoly. Natural monopolies exist where the advantages of size are so great that a service can only be provided at least cost if it is supplied by one, and only one firm. A single firm becomes a monopolist because the average cost of providing the service reaches a minimum only when an output rate large enough to satisfy the entire market has been reached. In a situation of this sort competition will not be sustainable. If there is more than one firm, each of them must be producing at a higher-than-minimum level of average cost; and so each will have a motive to cut price to raise output and thereby reduce average cost. The result is likely to be economic warfare, the outcome...
