Case Studies
Ford’s Model T
 Henry Ford gave America its first mass produced car. He made it cheaper to buy and build. Ford’s vision was to produce the perfect car…inexpensive and durable. It came in only one color..black.
Alfred Sloan, President of Ford’s number one competitor, General Motors, knew he couldn’t sell his cars cheaper than Ford’s. He took a gamble that people wanted more from their cars than a ride and that they’d pay more for the color, variety and options that they knew they could get from GM. GM’s advertising suggested to the consumer that an automobile represented his/her status and personality. So GM sold cars by making them look a little classier than the Model T. GM’s Chevy was beginning to make the Model T look cheap. Ford didn’t believe that Americans could choose GMs style over Ford’s substance. By the time the Depression started in 1929, GM had overtaken Ford in number of cars sold and the Model T was history. Soon Ford brought out a new car that offered colors and options and colors like GM, but it was too, late. Ford had to settle for second place.
| Comment & Analysis by Richard Gill What you have in the case of the American automobile industry, especially in recent years, is competition between a relatively small number of firms. This is called an oligolopy. In general oligopolistic firms like to avoid price competition. The automobile story brings out two ways firms can avoid price competition—through production differentiation and advertising. |
Price Fixing at TVA
 The Tennessee Valley Authority brought electricity to millions. In 1959, Julian Granger, a reporter with the Knoxville News-Sentinel paper noticed that the primary suppliers to TVA, General Electric, Westinghouse and Allis-Chalmers, had quoted identical prices despite the fact that it was closed bidding. Tennessee Senator, Estes Kefauver headed a Senate Committee to go after anti-trust violators. As the investigation of TVA’s identical bids continued, executives from the big firms like GE and Westinghouse and Allis-Chalmers confessed and prosecutors began to unveil the design of the conspiracy.
They tried to raise the prices at which their products were sold, and made sure that each of them got what it believed to be a fair share of the market. They rigged the bid. Executives were driven to do what they did by reason of being devoted to the company. Rigging the bids made life they reasoned would make life easier, and more predictable. They didn’t want to worry how much business they were going to have at year end. These firms and their executives risked fines and jail sentence to fix prices.
High Flying, Low Fares?
 The airline industry is an oligopoly, dominated by a few big carriers. But it was an oligopoly with a difference. For its first fifty years, a federal agency, the Civil Aeronautics Board, not the market, set the fares and routes.
But by the ’sixties and ’seventies it was clear that the airlines had all the evils of monopoly and cartelization with the added ingredient of protection. And in a world of stagflation, of wage-price spirals, of inadequate productivity, it was clear to almost all, that consumers wanted the benefits of competition . . . and that meant deregulation.
President Carter appointed Professor Alfred Kahn as chief deregulator. At first, deregulation brought only winners. There were lower fares, higher profits and new airlines. But then there were losers too. Braniff, Eastern, Pan Am, Peoples Airlines, all failed. Services deteriorated. Planes grew older, dirtier, maintanance poorer. Mergers and bankruptcies took their toll on the deregulators' dreams, of aggressive wide-ranging competition in the airline. Then on 9/11 the airline industry took a huge hit. Almost every major carrier was pleading for a government bailout. There were exceptions. Southwest Airlines, with lower costs was competing successfully by offering lower fares and fewer frills. But by the middle of 2003 with fewer travelers and higher costs, America's major airlines were in big trouble.
| Comment & Analysis by Nariman Behravesh Has airline deregulation worked? That depends. Through mergers and bankruptcies, many airlines have been forced out of business. However, deregulation succeeded in providing safe service to consumers at lowered costs . But many questions still remain about the future benefits of deregulation. |
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