Big Firms Block Gains

To run an airline, you need not only pilots, airplanes, and fuel, you also need landing rights at airports matching your planned routes and times. Today airlines must buy these rights one at a time via trades, and so risk ending up with mismatched slots that they cannot use.

Thirty years ago economists designed and tested package auctions to overcome this problem. In such auctions people can bid for the package of landing slots desired, and be assured of getting either all or none of the items in their desired package. Lab experiments have documented their efficiency advantages.

At a conference yesterday, someone said that the big airlines have consistently blocked attempts to field such auctions. The reason: because they buy more total slots, big airlines can more easily put together the packages they need. Big airlines oppose innovations that would make it easier for small airlines to compete with them.

This seems similar to how last year big movie studios got Congress to change laws to block the introduction of movie futures. Such futures would make it easier for small movie studios to get funding and to convince viewers that they had a product worth seeing.

Better economic institutions help people to better coordinate. But big firms suffer this problem less, because they can more easily coordinate in the absense of such institutions. Even in the US today, big firms (often with the assistance of law and government) block a great deal of institutional innovation, in order to retain this advantage.

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  • rapscallion

    But since we don’t have package auctions, moving to them must not be efficiency-enhancing. If the total economic gain to the small firms were worth it, they or their agents would pay off the big firms, and hence we’d have them.

    Inefficiency cannot be observed; the institutions we have are efficient.

    • B1shop

      When I got into the working world, I was utterly shocked to learn how unoptimized the world is. My experience tells me there is something dreadfully wrong with your theory.

      • Aron

        Yet when you observe inefficiencies that’s of course merely a feeling you have, with some stabbings at justification, and a huge does of various biases (principally the desire to feel in control). It means little until specific proposals are tested by fire.

        Change *does* happen, so apparently there are inefficiencies being corrected. Yet, it’s almost certainly not economists, from their perch of oversimplification and misaligned incentives, that lead the way. And yes, that’s the way the world is consequentially constructed: to ignore the advice of economists.

    • Matt Simpson

      You’re right in perfect competition, but in reality coordination is hard. How will these many small firms manage to coordinate together to raise enough money to pay off the larger firms?

      • rapscallion

        If constraints prevent coordination, then coordination is impossible, and hence it’s as pointless to point out that the package-auction counterfactual world has higher welfare as it is to point out that the Peace on Earth and Goodwill Towards Men counterfactual world also has higher welfare.

        If constraints don’t prevent coordination, but coordination would be the most efficient, then people must not be rational utility maximizers, and hence the concept of efficiency has no application.

        Inefficiency cannot be observed.

    • By that logic we’re already living in the most efficient world possible.

      • rapscallion

        Exactly. If you think the world is made of rational utility maximizers, you must believe this.

    • Cyan

      I can’t tell if this is conscious satire or not. Either way, I grant you the title of Dr. Pangloss.

  • Pingback: Big Firms Block Gains « Daniel Smith()

  • This would be the main argument for not allowing companies to have so much political power. Sinking ships like the big Hollywood studios have prevented the construction of life rafts. Big corporations are merely rent seekers in Washington: why do we allow them the same rights as individuals?

    • Because the “leaders” in Washington are rent seekers too. Using the monopoly power of government to create other monopoly powers that can then pay higher “rents” to the “leaders”.

      That is the whole objective of “too big to fail”. Compel the “leaders” to play “chicken” with the welfare of tens of millions, and you can extract considerable ransom, provided there is plausible deniability that it it an extortion-like transfer.

      Why do Visa and Mastercard extract a few percent of the value of transactions made with their cards? Because they can, and their monopoly power prevents lower cost competition.

    • Captain Oblivious

      Big corporations are merely rent seekers in Washington: why do we allow them the same rights as individuals?

      The problem isn’t that companies have too many rights; the problem is that politicians have too much power. They shouldn’t be empowered to grant such favors in the first place.

      Giving politicians the power to reduce the power of corporations (by denying them right/privileges within our economic system) will only make the overall problems worse, not better.

      I’ve never understood the mindset that says that aggregating more-or-less decent people into corporations (which individuals can freely choose to do business with, or not) brings out the worst in them, yet aggregating similar people into governments (which individuals don’t have any real choices about) will somehow bring out the best in them.

  • arch1

    Do the big airlines ever give reasons for their opposition to package auctions?

  • cournot

    This is a subset of the Mancur Olson insights about established leaders hanging on to rents. It’s not just corporations. Smart elites like worlds with high regulation and complicated rules because they can more easily navigate that world. Established universities resist transparency in admissions, in ranking, in student performance, because it makes it easier for newcomers to challenge them. Leading magazines, legacy media, big journalists, all want to keep the web down. Same story. Rent-seeking and rent-preservation. Elite collusion. Olson + North.

  • richard silliker

    Are we confusing efficiency with effectiveness?

  • randomfletch

    This is a totally circular argument. You’ve defined efficiency as the norm and then say that the norm must be efficient. It’s fairly easy to reduce your argument to absurdity. Lets say that there are only 2 people on an island. One of the people is starving, the other one isn’t. There is sufficient fish to feed both but the one in control of the fishing rod chooses not to allow the other access to it. The fishing rod owner is also the sharp stick owner, so can assert his dominance in the market effectively.

    Now, your argument is that the starving guy is optimising for not getting poked with a sharp stick so, overall, sharp stick poking taken into account, efficiency is maximised. Reasonable people the world over would suggest that perhaps there’s a better way.

    • randomfletch, you are correct, it is the fishing rod owner and the sharp stick poker who get to define the efficient use of their resources.

      If you want to apply different efficiency standards, then you must be a socialist.