Agency Theory - Good or Bad?

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 when they pass away.

Also, the airline industry has been in financial trouble more than once and has had to be bailed out by the federal government as a result. It is clear that while the airline industry market is mostly self-sufficient and mostly operates in a proper manner, there are obviously also some deficiencies and problems with the market, its structure and how it works in daily practice (DuBois). With all that said, there are always going to be downsides and they really cannot be avoided.

Further, the alternative to allowing deregulation and allowing these isolated failures is keeping the market regulated and thus keeping prices higher. Indeed, the question becomes one about the lesser of two evils. Neither system (regulated or deregulated) is going to be a panacea. Further, the deregulated market is clearly superior for the consumers and the airline companies than a regulated one. The important thing to note is that the government agencies that regulate the airline industry need to be mindful of what is going on.

They need to be as hands-off as possible when it comes to airline companies doing what they do but they need to step in when there are pervasive problems. Precisely that can and has happened in the past in the form of preventing airlines from having passengers sit on the tarmac waiting to take off for more than a certain amount of time.

After all, there is a difference between profit maximization and taking advantage of consumers being, more or less, a captive audience once they are on the plane and the fuselage door is shut (Jansen). To summarize some important points, the airlines should absolutely be allowed to make their routes and seating structures as efficient and free of waste as possible.

The benefits of allowing the routes and seating to be structured in a way to keep planes as full as possible and route choice as acclimated to the consumers' demands has obvious benefits. Further, too much deregulation can lead to rampant abuse of customers or extremely unwise business strategies, as was made clear by the Enron scandal in 2001 and a.