Prepared remarks: Acceptance of AAI’s Alfred Kahn Award for Antitrust Achievement (May 23, 2023)
Thank you, Diana Moss and AAI, for your most kind recognition of our work. I’m sorry not to be with you all in person to accept this meaningful award named for the late Alfred Kahn. I’m truly honored and humbled to receive this recognition. And, in my comments today, I’d like to tell you why this honor is so meaningful to me.
When Bert Foer founded AAI over a generation ago, he asked me to be on the initial academic advisory board. At the time, one of the most active and most prominent members of this board was Fred Kahn, still on the Cornell faculty and approaching 90 years old. Fred was as intellectually vital as ever and, as all who knew Fred could attest, he was incredibly humble. He would routinely ask me questions, for example, about why I saw network neutrality as a sound policy. And he would engage me in respectful and thoughtful dialogue in the most endearing fashion. I still miss him, and his memory lives on as a blessing.
With a budding friendship with someone almost 60 years my senior, I had the temerity to invite Fred out to the University of Colorado Law School, where I was building the Silicon Flatirons Center on Law, Technology, and Entrepreneurship. Some of you may have joined those conferences. Fred was always stimulating and entertaining. His wit was deservedly legendary. He quipped for example, in a quote I later learned the truth of firsthand: “a Dean is to a faculty what a hydrant is to a dog.”
One of the most special conferences I ever organized, and perhaps my favorite one, was a tribute to Fred Kahn. At that conference, we brought together Fred’s mentees and colleagues who could speak to his impact on the field of regulated industries, looking at airline deregulation, telecommunications regulation, and electric utility regulation. As an economist, Fred quite literally wrote the book on the Economics of Regulation. And as a public servant, his leadership at the New York Public Service Commission, at the Civil Aeronautics Board, and as an economics advisor to President Carter were justly celebrated.
Fred was a model policy entrepreneur. Through his leadership, he challenged the public choice theory of regulation. That theory, stated simply, provides a daunting critique that government action can best be explained by the lobbying prowess of powerful interests. As Judge Steve Williams, another deeply valued mentor and regular presenter at Silicon Flatirons conferences, once remarked, “entrants are regulated because incumbents want it that way.” When Uber and Lyft entered the market for ride sharing services, for example, there was a material risk that established taxicab companies—which in some cases had bid up the price of the right to offer services—could prevent upstart ride sharing services from operating. Thankfully, the public choice theory was not proven right in that context. What Fred’s example, which drove the successful deregulation of the airline industry, reminds us of is that while powerful incumbents can hire powerful lobbyists, the future does not have a lobbyist, unless leaders like Fred are on the case.
In the case of airline deregulation, Fred Kahn saw what the future could hold and deployed the political skills necessary to be a successful policy entrepreneur and to prove public choice theory wrong. With the limited exception of United Airlines, the incumbent airlines lined up against Fred’s reform proposal. What Fred had going for him was his wit, intellect, and conviction that the policy experiments in Texas and California made plain that competition in airlines would benefit consumers. Fred patiently made his case, built alliances on Capitol Hill, and had the fortitude to question established doctrine—that ruinous competition in airlines would result if there was not command and control regulation.
Fred Kahn lived long enough, however, to see both the benefits of airline deregulation and to see one of his foundational beliefs around this initiative fall short: that vigorous antitrust enforcement would emerge to protect and enable full and fair competition in airlines in the wake of deregulation. As Fred later put it, “deregulation in turn shifts responsibility for preserving that competition against threatened private suppressions by collusion, mergers, or unfair exclusionary tactics to the agencies charged with enforcement of the antitrust laws.” Unfortunately, antitrust has fallen short of protecting competition in the airline industry. And that’s a cautionary tale that deserves our attention.
The first failure of antitrust enforcement with respect to airlines is that the federal courts’ approach to predatory pricing took an unrealistic and damaging turn in the wake of the Supreme Court’s Brooke Group decision. Fred, with his characteristic wit, called out this mistake in memorable terms: “in the immortal words of John McEnroe, ‘[Justices Kennedy and Scalia], you can’t be serious!’” As Scott Hemphill and I have explained, moreover, Brooke Group still allows for different conceptions of how to establish a predatory pricing case (including what it means to price below cost), but courts have, unfortunately, failed to implement that decision in a more positive direction.
For a classic wrong turn in antitrust law, consider the Tenth Circuit decision in the American Airlines case. In its ruling, the court played right into the hands of incumbents who could shift capacity in a strategic fashion to undermine upstarts and establish a reputation for predation in the process. The facts around that case speak for itself—American Airlines only dedicated more capacity and lowered prices after a threat to its dominance emerged; once it extinguished that threat, it went back to pricing at its price level. Unfortunately, the court failed to take account of the opportunity cost of lost revenues when capacity is shifted to a targeted route and thereby missed the mark in its decision. And without a legal basis to take action in the face of such tactics, incumbents were given room to intimidate and exclude rivals through actions that, as Fred would see them, were plainly predatory.
The second failure of antitrust enforcement is in the merger arena. On account of mergers, there are now only four major carriers and, in most markets, the options for consumers are often limited to 2-3 providers that serve routes reliably in a given market. The level of concentration in airlines, as those here appreciate, resulted from a series of mergers that left incumbent firms with the ability to maintain prices that ensure healthy profits and deny consumers the benefits that competition brings. For a painful proof point of that hypothesis, consider that, in 2016, when there was a significant decline in fuel prices—which is a significant variable cost for airlines—the airlines did not lower prices for consumers. Rather, as the N.Y. Times colorfully put it, they offered free peanuts.
The final failing in the airline industry that I would call attention to is the treatment of consumers by established providers. In what can only be called an antiquated and unjustified rule, the ordinary oversight of consumer protection issues is compromised in this industry by a channeling of consumer protection issues to the U.S. Department of Transportation. Leading a broad bipartisan coalition of State Attorneys General, we have called for an end to that practice, which Congress will have the opportunity to address. In Colorado, we saw the impact of this lack of oversight when, during the pandemic, Frontier Airlines failed to treat consumers fairly and did not offer required refunds or credits to those not able to travel because of public health reasons. It took the USDOT only 2 ½ years to finally require Frontier Airlines to follow the law. The answer to this problem is simple: authorize dual authority for State AGs to enforce airline consumer protection law just like we can enforce antitrust law.
As I think about Fred’s legacy, let me remark on a final point that befits my current position: it’s important to keep the role of States, and State Attorneys General, in mind. It’s critical that a few brave states be able to conduct valuable policy experiments, like Fred did as Chair of the New York State Public Service Commission and as he appreciated was done for intrastate airline travel in California and Texas. In Colorado, we remain mindful of such action. In that spirit, our department took action several years ago in a vertical merger where the FTC declined to act, protecting patients who benefited from competition in the Medicare Advantage market. And we won’t hesitate to do again.
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The work that AAI does is more important than ever. Levels of corporate concentration, and a lack of competition, in many industries—from health care to airlines to Big Tech—is a call to vigilance. Thankfully, consumer issues are often bipartisan and rightly getting more attention—from surprise bills in health care to deceptive auto-renewing fees to consumer privacy.
Unfortunately, the type of policy entrepreneurship and bipartisan leadership that Fred Kahn championed to spur airlines deregulation is truly the exception in Washington, D.C. In a notable exception, Colorado Representatives Ken Buck and Joe Neguse have worked together across party lines to spur antitrust reforms, including a law that provides states with greater latitude on venue. On the state level, however, it is a different story. In Colorado, we take pride in our role as an innovator and have garnered bipartisan support for significant measures in consumer privacy law, a strong auto-renewal law, protections on medical debt collection, and more. That’s a record that honors Fred’s legacy. Thank you for this kind award. I am deeply honored to be considered one of Fred’s students and to have had a small role in doing this work that honors his lasting legacy.