Economics Commentary #3 US Airways Files Antitrust Lawsuit Against Sabre

US Airways Files Antitrust Lawsuit Against Sabre

US Airways (NYSE: LCC) today filed a federal civil antitrust lawsuit in the Southern District of New York against Sabre Holdings Corp. to halt anticompetitive and anticonsumer practices, as well as recover monetary damages. According to the complaint, Sabre, which is a dominant distributor of airline fares and content to travel agents, has engaged in a pattern of exclusionary conduct to shut out competition, protect its monopoly pricing power, and maintain its technologically-obsolete business model. US Airways contends that Sabre has wielded its significant market power and control through exclusionary commitments from travel agents and other Global Distribution Systems (GDSs), as well as through anticompetitive requirements placed on US Airways and other airlines in order to sell their tickets. All of these actions by Sabre hurt consumers through higher prices, reduced innovation and fewer choices. Sabre’s Monopoly Limits Competition and Hinders InnovationSabre is the largest GDS in the United States and exercises enormous market power over airlines, including US Airways. Over 35 percent of US Airways’ revenue is booked through Sabre and Sabre affiliated travel agents. Sabre structures the distribution model so that travel agents, whether they are a traditional travel agency or one of the large online travel agencies that many consumers use directly on the Internet, are typically forced to rely on a single GDS to book airline tickets on behalf of their customers. According to the complaint, Sabre imposes significant economic penalties on travel agents relating to bookings not made using Sabre. If Sabre excluded US Airways from its offerings to its travel agents, those agents could no longer book US Airways tickets through Sabre. US Airways would not be able to survive the subsequent loss of revenue. Given this disproportionate market control, US Airways is forced to accept Sabre’s monopolistic practices. Today’s lawsuit follows after the recent execution of a new distribution agreement between Sabre and US Airways, which was reached in late February 2011. During negotiations with Sabre, US Airways made it clear to Sabre that it sought a new contract without exclusionary restrictions that protect Sabre from competition. However, Sabre threatened to shut off access to US Airways if the new agreement did not include these anticompetitive restrictions. According to the complaint, US Airways was forced to acquiesce to Sabre’s “my way or the highway” demands as a part of any new deal.

Extract: US Airways Files Antitrust Lawsuit against Sabre

Source: The Street
Extract Date: April, 21, 2011
Commentary Date: May 17, 2011
Word Count:753
Relevant Syllabus Section: 2
U.S. Airways filed a legal complaint against Sabre the dominate distributor of airline fares and content to travel contents, for engaging in anticompetitive market strategies to sustain its monopoly pricing power.  While Sabre (Global Distribution System) will flourish having to deal with no competition making abnormal profits, its dependents however, Airline companies and ultimately the consumer will suffer.
Sabre sustains its monopoly by imposing specific price requirements on Airline tickets. The Airlines rely so heavily on Sabre in the promotion and disruption of tickets that Airlines are forced to stick with Sabre.  U.S. Airways for example makes 35% of total revenue through Sabre, making it impossible for U.S. Airwaves to leave Sabre without an unacceptable and Sabre can easily be identified as a monopoly as it is a single seller, creating barriers for other firms to enter the market; in this case Sabre imposes heavy economic penalties on travel agencies whose bookings do not run through its company.
The consequences of this are a maximization of profit with a decrease in output.
Sabre revenue curves will be downward sloping, imposing barriers to entry which give it its market power. 
Profit Maximization will occur where MC=MR. Sabre will earn abnormal profits both the short and long run. It will however eventually and already has become allocative and productively inefficient.  Charging high prices but lacking technological ingenuity  and variety in their products. In addition P>MC as consumers pay higher prices than the cost of producing the product (service). 
U.S. Airways is legally pushing for Sabre to open up for competition, reducing barriers and allowing other firms to enter the market. Theoretically pusing for Perfect Competition. Implying that consumers would have Perfect knowledge as well as a large number of small firms competing in the market. If sabre were introduced to a Perfect competition market, it would be forced to quickly exit, as its prices which are well about those of the Market Equilibrium and of those at which the competition is selling.
Graph to show Industry (Travel Distributor)
 The demand is fairly elastic as most consumers through what firm their tickets are bought or booked through. The Market would set the price, and companies such as sabre would be price takers, having to accept the price of production or else having to exit the market. Companies which fail to adapt in terms of their factors of production to the market and fail to allocate there resources efficiently are forced to leave the market, such as sabre currently.
 Profit maximization occurs where MC=MR.  While in the Short Run abnormal profits are possible, in the long run new firms would be attracted to by these profits and enter the market, as supply then increases price (profit falls). As long as Abnormal profits are being made companies enter the market until normal profits are made.
However it is very unlikely that Sabre will give in to these demands, as they are not in the position too and would with the entry of competition in the market only lose profit.
In my opinion U.S. Air ways is doing the correct thing and raising up against the Sabre monopoly. Although ultimately powerless against the Travel distributor giant, (as US airways is to dependent on Sabre), U.S. Airways brings up a good point illustrating the negativities Sabre is spreading not only through the industry of Travel Distribution but also Airline technology and tourism. Without competition there is no initiative for sabre to be producing at its maximum capability both in terms of technological progress and variety, which eventually only the consumer suffers from. I would like to see the government open the market by removing  Sabres barriers to new industries, consequently the market would see leaps in efficiency not only in price but also in output and products/ services produced.
Definations

Monopoly, – When a firm owns 25% or more of the total market share in the market

 Abnormal Profits, – or supernormal profit is the term of profit exceeding the normal profit

Market Power,- the power to change price

Barriers to Entry,- obstacles monopolies create to diminish competition in the market.

Perfect Competition,-  ccurs in markets in which no participant has market power. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets

Elasticity,– The degree to which a price change for an item results from a unit change in supply(called supply elasticity) or a unit change in demand(called demand elasticity). The opposite of inelasticity

Factors of Production,- resources employed to produce goods or services.

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