U.S. Deregulation of Transportation and Telecommunications
U.S. reforms opened airlines, trucking and telecommunications to more competition, lowering many prices while creating new trade-offs.
Key figures
Real airline fares
Nearly 40% lower
By 2005, GAO found that median airfares had fallen by nearly 40% in real terms since 1980. GAO cautioned that deregulation was not the only factor behind the decline.
Real trucking rate
53% of 1980 level
Federal Highway Administration analysis found that inflation-adjusted revenue per truck-mile in 1999 was approximately 53% of its 1980 level.
Real long-distance phone prices
More than 50% lower
In 1994, the U.S. Department of Justice reported that real interstate long-distance prices for the average residential customer had fallen by more than 50% since the AT&T settlement.
At a glance
- The Airline Deregulation Act of 1978 removed federal controls over many domestic airline fares, routes and decisions about entering markets.
- The Motor Carrier Act of 1980 reduced restrictions on trucking firms, making market entry easier and allowing greater price competition.
- The 1984 breakup of AT&T opened important parts of telecommunications to more competition, although it was an antitrust restructuring rather than deregulation alone.
- The Telecommunications Act of 1996 sought to open previously protected local telecommunications markets to competition and reduce regulation as competition developed.
- For IB Economics, the case shows how deregulation can increase competition and productivity and potentially shift LRAS to the right, but the benefits were uneven and continued regulation remained necessary in some markets.
Background
Before the late 1970s, several major U.S. industries were subject to extensive economic regulation. Economic regulation refers to government controls over areas such as prices, market entry, routes and the services firms may provide.
In airlines, the Civil Aeronautics Board regulated interstate fares and routes. In trucking, the Interstate Commerce Commission controlled areas including operating authority, routes and rates. These rules were partly intended to provide stable services and protect consumers, but critics argued that limiting entry and price competition could also protect existing firms from competitors and keep costs or prices higher than necessary.
Telecommunications was different. The Bell System, dominated by AT&T, operated much of the telephone network as a regulated monopoly. A regulated monopoly is a market dominated by one supplier whose prices and behaviour are controlled by government because normal competition is limited or impractical.
During the 1970s and 1980s, policymakers increasingly used deregulation, meaning the removal or reduction of government restrictions on firms, to encourage greater competition. In IB Economics, deregulation is classified as a market-based supply-side policy because it attempts to improve efficiency and productive capacity by strengthening market incentives rather than through direct government production or spending.
What happened
The United States introduced a series of reforms rather than one single deregulation policy.
In 1978, the Airline Deregulation Act began removing federal control over domestic airline fares, routes and market entry. Airlines gained much greater freedom to decide where to fly and what prices to charge. New and existing airlines could therefore compete more directly on price and service.
In 1980, the Motor Carrier Act reduced economic regulation of interstate trucking. Entry restrictions were relaxed, trucking firms gained more freedom over the routes and goods they served, and price competition increased. GAO found shortly after the reform that competition had increased considerably and that large shippers were increasingly able to negotiate lower rates.
Telecommunications followed a more complicated route. In 1982, the U.S. Department of Justice reached an antitrust settlement with AT&T. The resulting restructuring took effect in 1984 and separated AT&T's local telephone companies from its long-distance operations. This allowed greater competition in long-distance telephone services and telecommunications equipment. It should not be described purely as deregulation because the change resulted from antitrust policy, which uses laws and government action to limit monopoly power and protect competition.
The process continued with the Telecommunications Act of 1996. The Federal Communications Commission described the law as a major shift away from protecting regulated telecommunications monopolies and towards opening networks to competition. Local telephone companies were required to provide competitors with forms of access to their networks, with the longer-run aim of allowing competition to replace some direct regulation.
Timeline
24 October 1978
The Airline Deregulation Act became law, beginning the removal of federal controls over airline fares, routes and market entry.
1 July 1980
The Motor Carrier Act of 1980 reduced entry and pricing restrictions in interstate trucking.
1982
The U.S. Department of Justice and AT&T agreed to an antitrust settlement that required the restructuring of the Bell System.
1 January 1984
The AT&T divestiture took effect, separating the regional Bell telephone companies from AT&T's long-distance business.
8 February 1996
The Telecommunications Act of 1996 became law, establishing a framework intended to increase competition and reduce regulation in telecommunications.
Using this in the exam
Use this example when explaining or evaluating market-based supply-side policies, especially deregulation.
In an explanation paragraph, state that the United States reduced economic regulation in industries such as airlines and trucking. Removing restrictions on entry and pricing increased the ability of firms to compete. Greater competition can pressure firms to reduce costs, improve productivity and innovate because inefficient firms risk losing customers to competitors.
You can then connect the policy to long-run aggregate supply (LRAS). If deregulation raises productivity and allows resources to be used more efficiently, the economy's productive capacity increases. On an AD-AS diagram, show LRAS shifting to the right from LRAS1 to LRAS2. This represents an increase in potential output and may allow higher real GDP with less inflationary pressure in the long run.
You can also use a PPC diagram. If competition and productivity improvements allow the economy to produce more from its existing resources, productive potential increases and the production possibilities curve shifts outwards.
Add a concrete result. For example, GAO reported that median U.S. airfares were nearly 40% lower in real terms in 2005 than in 1980. However, do not claim that deregulation alone caused the entire fall. GAO specifically noted that technological change and other economic factors also affected fares.
For evaluation, explain that the success of deregulation depends on whether genuine competition develops. Removing rules from a competitive market can strengthen incentives and reduce costs. Removing rules from a natural monopoly or highly concentrated market may instead allow firms to gain market power. This is why the telecommunications example involved both deregulation and active antitrust intervention.
A common mistake is to say that deregulation means removing all government regulation. The reforms mainly reduced economic regulation such as restrictions on prices and entry. Safety, consumer protection and competition rules continued to exist.
Syllabus topics
Diagrams to use
Test yourself
Questions this example can answer
- Using a real-world example, explain how deregulation can increase the productive capacity of an economy.
- Using a real-world example, explain how a market-based supply-side policy may affect long-run aggregate supply.
- Evaluate the effectiveness of deregulation as a market-based supply-side policy.
- Discuss the view that increasing competition is an effective way to achieve long-term economic growth.
Evaluation
Arguments in favour
Greater competition can lower prices
Removing barriers to entry allows more firms to compete for customers. This puts downward pressure on prices and forces existing firms to respond. U.S. airline fares fell substantially in real terms after deregulation, while trucking rates and long-distance telephone prices also declined.
Competition can improve productive efficiency
When firms can lose customers to lower-cost competitors, they have a stronger incentive to reduce unnecessary costs and use labour and capital efficiently. If productivity rises across industries, unit costs can fall and the economy's productive capacity can increase.
Deregulation can encourage innovation and consumer choice
Firms facing stronger competition have incentives to offer different prices, services and technologies. Telecommunications competition was associated with the expansion of new equipment and services, while airline deregulation allowed carriers to experiment with new routes, pricing systems and business models.
Lower transport and communication costs can benefit other industries
Businesses use freight transport, air travel and telecommunications as inputs. If competition reduces the cost or improves the flexibility of these services, firms elsewhere in the economy may also face lower production costs. This creates a possible wider supply-side effect beyond the deregulated industries themselves.
Arguments against
Deregulation does not guarantee strong competition
If economies of scale, control of infrastructure or mergers allow a small number of firms to dominate a market, removing regulation may not create competitive outcomes. GAO found that airline fares were higher at concentrated airports, showing that the benefits depended on the degree of competition in each market.
Workers and existing firms can lose
Stronger price competition puts pressure on firms to reduce costs. In trucking, deregulation was followed by firm failures, changes in union employment and pressure on wages and working conditions. Lower consumer prices can therefore involve significant adjustment costs for workers and producers.
Some communities may receive less profitable services
Once airlines gained greater freedom to choose routes, there was a risk that small communities would lose services that were commercially unattractive. The U.S. therefore retained the Essential Air Service programme to subsidize air links for eligible communities, showing that markets alone did not provide every socially desired service.
Some industries still require regulation or competition policy
Telecommunications networks can contain natural-monopoly characteristics because duplicating infrastructure may be expensive. The AT&T case therefore required antitrust action and later rules requiring network access. Deregulation can work poorly if firms retain enough market power to block new competitors.
Context and assumptions
The effect on LRAS is indirect
Deregulation does not mechanically shift LRAS to the right. The shift occurs only if stronger competition actually raises productivity, lowers production costs or increases the quantity and quality of productive resources.
Other factors affected prices
Technological change, fuel prices, the business cycle and changes in business models also affected transport and telecommunications prices. Falling prices after deregulation are therefore evidence consistent with the policy mechanism, but they should not all be attributed to deregulation alone.
Different industries require different policies
Airlines and trucking can support multiple competing firms relatively easily, while parts of telecommunications historically had stronger natural-monopoly characteristics. The appropriate amount of regulation therefore depends on the structure of the market.
Short-run costs can accompany long-run gains
New competition can initially cause bankruptcies, unemployment and restructuring. Over a longer period, resources may move towards more productive firms, but workers and regions affected by the transition may face substantial costs before those efficiency gains appear.
Key terms
- Deregulation
- The removal or reduction of government rules and restrictions on firms in order to allow markets and competition to play a greater role.Taught in Unit 3.7: Supply-side Policies
- Market-Based Supply-Side Policy
- A government policy that aims to increase productive capacity by strengthening market incentives, competition and the role of the price mechanism.Taught in Unit 3.7: Supply-side Policies
- Long-Run Aggregate Supply
- The total output an economy can produce when its factors of production are fully employed at their sustainable productive capacity.Taught in Unit 3.2: Variations in Economic Activity: Aggregate Demand and Aggregate Supply
- Productive Efficiency
- A situation in which output is produced at the lowest possible average cost using the available resources and technology.
- Competition
- A situation in which firms compete with one another for consumers, creating incentives to lower prices, improve quality and operate efficiently.
- Natural Monopoly
- A market in which economies of scale are so large that one firm can supply the entire market at a lower average cost than several competing firms.
- Antitrust Policy
- Government laws and actions designed to prevent anti-competitive behaviour and limit the abuse of monopoly power.
- Regulatory Capture
- A situation in which a regulatory agency becomes influenced by the industry it regulates and may act more in the industry's interests than in the wider public interest.
References
Sources
- 01
Airline Rules and Fares
U.S. Department of Transportation
- 02
Status and Impact of the Motor Carrier Act of 1980
U.S. Government Accountability Office
- 03
Technological Innovation and Monopolization
U.S. Department of Justice
- 04
Implementation of the Local Competition Provisions in the Telecommunications Act of 1996
Federal Communications Commission
- 05
Airline Deregulation: Reregulating the Airline Industry Would Likely Reverse Consumer Benefits and Not Save Airline Pensions
U.S. Government Accountability Office
- 06
Transportation Infrastructure, Freight Services Sector and Economic Growth: Appendix A
Federal Highway Administration
- 07
Testimony of Anne K. Bingaman on Telecommunications Competition
U.S. Department of Justice
- 08
A Brief History of Regulation and Deregulation
George Washington University Regulatory Studies Center
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