180 COMPETITION LAW IN TOURISM “when entry restrictions into individual city-pair markets are eased, monopoly-oligopoly problems that might otherwise arise in individual city- -pair markets should be successfully kept in check by the threat of entry into those markets by the (efficient-size) firms operating in other city-pair markets, or even by de nouveau entry20”. Even if it is doubtful whether they are natural or perfect contestable markets, this theory based on the freedom of entry and exit in a market makes it possible to assess the effects of potential competition on airlines markets. If potential competition, in general, had a no–tomodest effect on fares on FSCs, other studies suggested a greater effect for LLCs when they are potential competitors21. In the US airline industry, carriers did respond to the threat of major LCCs entry such as Southwest and dropped their fares substantially when they were threatened on a route and before Southwest actually operated the route. 2.2. The Benefits of Economies Of scale, Density and Scope A natural monopoly exists when a single firm can produce an output at a lower per unit-cost than can two or more firms. High fixed cost industries such as network utilities (gas, electricity, water, rail or telecoms) are very capital-intensive and require an initial investment to be absorbed through a long-run average cost that is decreasing over time. As too much competition in these industries will require duplicating intensive capital equipment with lower or no return on investment, there may be room only for one efficient-size and profitable operator. One large firm can produce more at a lower cost per unit than at least two or more smaller ones. Only one large firm would be able to exploit the economies of scale and to achieve cost efficiency. The debate about the natural monopoly’s possibility in the American airline industry was raised before the US 1978 Deregulation Act. Too much regulation over a natural monopoly in the airline industry would lead to lower load factors, increased average costs and eventually higher prices for the consumers. In the airline industry, one of the key indicators for measuring cost is the Cost Per Available Seat Kilometre (CASK). Firstly, the costsaving effect will be reached through efficiency gains (economies of scale, density and scope). 20 White, 1978, “Economies of Scale and the Question of Natural Monopoly in the Airline Industry”, Journal of Air Law and Commerce, Volume 44, Issue 3, Article 3. 21 Morrison, 2001, “Actual, Adjacent and Potential Competition: Estimating the Full Effect of Southwest Airlines”, Journal of Transport Economics and Policy, 35, 239–256.
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