Question

(Related to the Apply the Concept on page 489 ) For many years, airlines would post proposed changes in ticket prices on computer reservation systems several days before the new ticket prices went into effect. Eventually, the federal government took action to end this practice. Now airlines can post prices on their reservation systems only for tickets that are immediately available for sale. Why would the federal government object to the old system of posting prices before they went into effect?

Short answer

The federal government likely objected to the old system due to the potential for market manipulation and unfair competition which could disadvantage consumers. By posting future prices, airlines could influence consumer behavior and drive up demand artificially, leading to price inflation. Therefore, the new regulation promotes transparency and fairness in the market by ensuring that displayed prices are for tickets immediately available for sale.

Step-by-step solution

Understanding the Problem

To solve this, we need to grasp the difference between the old and new system in posting ticket prices, and the potential implications. In the old system, airlines could announce new ticket prices in advance, while in the new system, airlines can only post prices for immediate sale.

Identifying the Potential Problems of the Old System

In the old system, by posting proposed prices several days before they were actually applicable, airlines could indirectly manipulate the market by influencing customer's buying behavior. Consumers might rush in to buy tickets before prices increased, leading to a surge in demand that was not naturally driven. This kind of practice could lead to price inflation and unfair competition, which would not be in the best interest of consumers and fair market principles.

Understanding the Reason for the Government's Intervention

Seeing the above possible issues, it can be understood that the federal government aimed to promote fairness and transparency in the airline industry by prohibiting the practice of posting future prices. This intervention assures that prices displayed are for tickets that are immediately available, preventing airlines from influencing customer behavior through proactive price announcements.

Key concepts

Airline Industry Regulation

The airline industry operates under a complex framework of regulations. These rules and guidelines are often put in place to maintain fair competition and transparency. In the context of posting ticket prices, the regulation shifted from allowing airlines to announce future prices to requiring that posted rates are for immediate sales.

This regulation helps to keep the market stable by ensuring that what consumers see, they can buy right away. If airlines could post prices for the future, they could manipulate demand. This, in turn, could create artificial scarcity or urgency, urging consumers to purchase quickly. By enforcing immediate availability, the regulation prevents these practices.

• Prevents manipulation of demand to ensure stable pricing.
• Keeps competition fair among airlines.
• Assures that what consumers see is what they can purchase right away.

Without regulations, airlines with more resources could push smaller competitors out, leading to reduced consumer choices.

Consumer Protection

Consumer protection is a vital element in all markets, including airlines. It's about making sure consumers are not tricked or misled. In this scenario, by removing the posting of future ticket prices, consumers are protected from confusion and undue stress.

When airlines posted future price changes, consumers might rush to buy tickets under the belief that prices would increase quickly. This could lead to hasty and misinformed decisions. Protecting consumers from these kinds of tactics ensures a fairer market where decisions are based on accurate and current information.

• Reduces stress from pressured buying situations.
• Promotes informed decision-making.
• Enhances trust in airline price postings.

Overall, this practice empowers the consumer with transparent and reliable price data, allowing for better travel planning.

Market Fairness

Market fairness is crucial to maintain a healthy economy and competitive environment. Regulations such as those in the airline industry ensure all players follow the same rules, thus creating an even playing field.

When one airline indicates future price changes, it can manipulate the market strategic decisions of others. If only some have the insights on the upcoming prices, they might adjust their strategies unfairly. Market fairness means everyone competes based on equal information.

• Ensures a level playing field for all competitors.
• Prevents market manipulations through insider knowledge.
• Encourages ethical competitive practices.

By removing the ability to announce prospective price changes, the airline industry maintains integrity, assuring that all companies can compete on equal terms.