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Overshooting the Runway: Ensuring Well-Intentioned Airline Fee Regulations Don’t Go Too Far

· September 30, 2014

The unintended consequences of well-meaning regulation is a theme we discuss frequently here on DisCo.  (Note: This is different than cynical, anticompetitive regulations that are pushed under the guise of well-intentioned “consumer protection”, which is another recurring DisCo topic.)

In that vein, I filed comments on behalf of CCIA discussing the potential impact of new proposed regulations by the Department of Transportation aimed at requiring airlines to disclose the full cost of travel up front (instead of playing hide the ball with a litany of added fees).

The aim of this rulemaking is noble and economically sound. Econ 101 tells us that competition works best when certain conditions are present.  One of those conditions is that “perfect information” is available to consumers and producers.   The principle is that markets work best when everyone involved knows the full price up front and can assess their options before purchasing.  (Obviously, “perfect” is an ideal on one side of a continuum.)  In fact, this is an area where all sides of the political spectrum should agree — at least in theory.  Narrow rules that increase pricing (and quality of service) transparency would help the free market work better, and decrease the need for regulation, as consumers would be better able to discipline market participants with their consumption decisions.  In English that translates to: if airlines are screwing consumers on price or quality, and consumers know that up front, they can purchase a ticket on another airline, making that airline less likely to screw customers.   Hence, the “disciplinary power” of a well functioning market.  (Now, it is an entirely different debate as to whether the airline market is competitive enough given the recent wave of airline consolidation and the market’s unique structure, but that is an argument beyond the scope of this post.  No matter how competitive that market is right now, it is difficult to argue with the contention that better pricing information up front will make it work better.)

However, while “open data” is a good thing, regulations that go further than requiring a standardized output of raw data, governing how data is displayed by third parties, would be unwise.  As the growth of the Internet economy has illustrated, the packaging and display of information to consumers is an important sector of economic activity where new participants and innovation currently abound.  Locking in a particular type of display or presentation would slow growth and harm competition in the metasearch market.

With that in mind, here’s my roadmap for facilitating transparent air travel competition:

  1. DOT should require airlines to make their extra fees transparent to potential purchasers of airline tickets.  Not only is open pricing data a sound goal, but it will fuel the thriving travel search industry (aka “metasearch”) by providing websites such as Kayak, Bing Travel, Google Flight Search and Hipmunk more raw material to create more accurate flight search results.  The goal of these companies is to make it easier for consumers to compare travel options, so opening up more pricing data to them will naturally encourage DOT’s desired pro-consumer effect without the need for more onerous regulation.
  2. Regulations requiring the disclosure of travel cost information by airlines and ticket agents should not extend to telling metasearch sites how to display information.  How metasearch companies display and package travel information to consumers is they key differentiating factor between metasearch sites.  Defining an overly rigid display format could have the unintended consequence of harming innovation and competition in this space.  As an example, Hipmunk, a travel startup that has recently shown strong growth and consumer appeal, received $20 million in venture funding based on its novel ideas in displaying and organizing travel information.
  3. The DOT should also avoid classifying metasearch sites as traditional travel agents, as the sites themselves are merely information tools and do not have control over the ticketing process.  One key principle of U.S. Internet policy, reflected in laws such as Section 230 of the CDA and the DMCA safe harbor, is that Internet intermediaries are not the providers of the underlying product or service and, therefore, should not be subject to the same responsibilities or liabilities as the providers of the underlying service.  In this case, that service is directly selling air travel inventory.  (For a longer discussion of Internet intermediary policy, see this comprehensive OECD report.)

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.