What Happens When Competition Goes Away?

Being No. 1 is the best … except when it’s not. I lived in Cincinnati for eight years, and for most of that time, Cincinnati’s airport bore the distinct honor of sitting in the No. 1 slot on the list of most expensive airports in the country. Everyone likes to be No. 1, but as a customer of Cincinnati’s airport (CVG), I can assure you I would have been happy to take my business to anyone lower on that list. And I did. There were several occasions where we drove an hour and a half to Louisville or two hours to Indianapolis because tickets were $250 cheaper per seat.

Cincinnati is a large Midwest city, headquarters to several large companies, and home to two professional sports teams. So why was it so expensive to fly through CVG?

Consolidation.

Delta used CVG as one of its major Midwest hubs through the early 2000s. In 2008, Delta purchased Northwest Airlines, resulting in the new conglomerate being responsible for 68% of all flights through CVG. Any guesses what the “big guys” did after they bought up the competition? Within one month of the deal closing, Delta cut its service through CVG by 33% and raised prices, helping Cincinnati earn its dubious No. 1 ranking.

This may hit close to home in any market — what happens when competition goes away?

1. Prices increase. This is where the basic economic law of “supply and demand” enters the equation. If there is a product or service that is broadly desired in any market, the demand will be high. When a single company is the sole provider of that product or service, the supply will be comparatively low. When there is a high demand and a low supply, the price for that product or service will go up. Sometimes it will go way up.
2. Services decrease. A company’s resources (time and money) are always limited. Management is constantly deciding where to allocate those scarce resources. As a company’s customer base grows, the resource needed to keep each customer satisfied grows. Without competition, there is no incentive to focus that valuable resource on each customer’s satisfaction since the customer has nowhere else to go. Resources get directed to places other than increasing customer satisfaction.
3. Innovation dies. When things are going well for a business, the motivation to invest in innovative new ideas shrinks. As mentioned above, companies spend time and money where they think it will best be rewarded. Without competition driving the race to innovate, new ideas take longer to brainstorm and bring to market.

How satisfied were you with your service the last time you renewed your driver’s license at the DMV? How friendly was the service from your local TSA agent the last time you had to fly? How many competitive options do you have when it comes to needing either of these services?

When competition exists in the market, companies have to keep their prices competitive, their service more friendly and responsive, and their investment in innovation high. Competitive options allow the customer to award business to those companies that demonstrate they value receiving that business. This is called a free market and is the natural result of the customer having the option to do business where they want, when they want, and how they want.

So, what happened at CVG? The airport CEO fired the consultant who kept telling him to stick with the big guys and hired one who specialized in creating competition. It didn’t take long for smaller airlines to rush in, offer new services and innovative business models, and provide much lower fares. Within a few years of this happening, CVG dropped from 1 on the list of most expensive airports to 83.

Competition always produces better outcomes for customers. Lack of competition always produces worse outcomes for customers. When consolidation happens, customers pay more and get less, get stuck with burdensome contracts, are forced to endure poor customer service, and see less innovation to solve known industry concerns. In short, when there is no competition in an industry, the only winner is the company that is supposed to be winning your business in the first place.