The Real Meaning of Competition

by Peter G. Klein

The aviation world has been all atwitter about the prospect that Virgin America, the US-based subsidiary of Richard Branson’s Virgin Empire is up for sale. Reportedly, Jet Blue — another smaller American carrier — is in the lead as a possible acquirer for Virgin America. The big American carriers, Delta, United, and American Airlines supposedly are out of the running. This is because the US Justice Department, the Federal Trade Commission, Federal Aviation Administration, and other government agencies responsible for maintaining competition in the airline industry, would not allow them to acquire Virgin America.

Partly this is based on an incorrect understanding of what competition means. According to mainstream economists and government regulators, competition is determined by the number of firms in a particular industry. Because we have only three of the legacy carriers left, Delta, American, and United, each having acquired other former American carriers, it’s argued that that industry is not sufficiently competitive.

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