Agency Theory - Good or Bad  Essay

Airline Deregulation

There are many questions about whether the deregulation of the airlines was a success or not. Some assert that it was a "great success" due to the lower fares that were realized by a lot of airline passengers. However, whether that is really true will be explored. There is also a question of whether there could be some downsides to airline deregulation. Finally, there will be an offering and explanation of the lessons that have or do exist as it relates to relaxing of regulations in other industries. While deregulation can be a good thing, being too lenient and relaxed about regulations can lead to abuses and customers getting swindled or otherwise negatively impacted (Nicholson, and Snyder).

Analysis

If there is one great lesson that was taught to the airlines themselves as well as broader industry when the airlines were deregulated, it was the concept of how marginal cost and elasticity of demand can be utilized and employed to maximize profits. To answer the question of whether the deregulation of the airline industry was a success, the answer would be a cautious "yes." There is an emphasis on the word "cautious" because while that solution and move paid massive dividends for the airline industry, there have been some downsides since then and there are some situations where deregulation is probably not the proper answer. There are many people that ascribe to what is known as agency theory. Agency theory asserts that a powerful regulatory body and set of regulations is necessary because there will absolutely be bad actors in the industry in question if that agency and its rules are not present. The other school of thought would be that anti-agency theory and allowing the markets to survive and thrive on their own. What manifested in the airline industry was very much more the latter rather than the former. Indeed, the airlines were ostensibly being limited and choked by the regulations and this led to a market condition that was artificial and far from being based on the maximization of profit. In short, deregulation is often a good idea but there do need to be controls and mechanisms in place to correct the market if it starts behaving in a way that hurts consumers and/or takes advantage of them (Eisenhardt).

Indeed, there is a question about the downsides of deregulation and there have indeed been some in the airline industry. One sterling example is the tactic of over-booking airplanes so that there are not any empty seats on the plane when people cancel. To be sure, airlines have a vested interest in having their planes as full as possible and they lose money if they are not. At the same time, overbooking leads to people missing a flight due to not fault of their own and this can create some tense or even emergency situations in the worst of circumstances. The consequences could be as minor as being late to a meeting or could be a major as missing a wedding or not being at the bedside of a relative…