When the price does not fall with the cost

The New York Times reports a puzzle that is, on reflection, no puzzle at all: even if conditions shift in ways that might relieve pressure on jet fuel, airline ticket prices are unlikely to follow — because, as the story puts it plainly, airlines know travelers are willing to pay more. This is a sentence worth sitting with. It describes not a market clearing honestly but a market in which the seller has learned, with some precision, just how much the buyer will bear before walking away. And in a market with few sellers and high barriers to entry, walking away is not always an option.

I have no recollection of jet turbines or the petroleum trade as it stands today, and I will not pretend otherwise. But the underlying structure I recognize completely. In the corn trade, in the wool trade, in the carriage of goods by sea, whenever a small number of sellers can observe one another's prices and anticipate one another's restraint, the consumer pays more than the natural price — that is, more than what would prevail if competition were doing its proper work. The Times story suggests airlines possess exactly this kind of pricing discretion, and they are exercising it.

There is nothing scandalous, in itself, about a merchant charging what the market will bear. That is what merchants do, and in a competitive market the discipline of rivals keeps that impulse honest. The question is always institutional: what disciplines the exchange? If five or six carriers control the great majority of seats on the routes that most travelers must fly, then the discipline of competition is weak, and the consumer absorbs whatever the seller chooses to charge above cost. The fuel cost is the excuse; the market structure is the cause.

I observed in my own time that the monopolist, or the small ring of merchants who act in concert, will always contrive to raise prices above what free competition would produce — and that they will always supply a respectable-sounding reason for it. Rising input costs are among the most respectable. They are not false. Jet fuel is genuinely expensive, and a rise in its price does pass through to the ticket price. But the Times implies — and I take this as inference, not recollection — that the pass-through is asymmetric: costs rise quickly in the fare, but do not fall quickly when costs ease. That asymmetry is the signature of market power, not of a market working honestly.

What then should the public authority do? I have never been an enemy of commerce, and I am not one now. But I argued clearly that the monopolist's interest is, and must be, contrary to the interest of the consumer and of the public at large. Where a market has consolidated to the point that pricing discretion of this kind becomes routine, the proper remedy is not to fix prices by decree — that road leads to its own disorders — but to restore the conditions of competition: lower barriers to entry, prevent collusive coordination, and ensure that no single carrier or small cartel can block rivals from the routes and gates they need to contest the market. These are institutional questions, not engineering questions, and they are entirely within the competence of the public authority to address.

The deeper lesson the Times story illustrates is one I pressed throughout The Wealth of Nations: the interest of the producer is always, in the short run, to narrow the competition and widen the margin. The interest of the consumer — and of the public — is always the opposite. A government that has been persuaded by the airline lobby to protect incumbent carriers from new entrants, or that has permitted consolidation to proceed unchecked, has done exactly what the merchants of my own century did when they wrote the navigation acts and the corn laws: transferred wealth from the many who buy to the few who sell, and called it sound policy. The consumer paying an inflated fare today is owed, at minimum, an honest account of why the price remains high when the stated cause has passed.