Airfare Transparency Made the Free Market Freer
Cass R. Sunstein notes:
“The tale begins on Jan. 26, 2012, the effective date
of a regulation from the U.S. Department of Transportation requiring online
travel agents and air carriers to include all mandatory fees and taxes in their
advertised fares. 1 The regulation was influenced by research in behavioral
economics suggesting that when taxes are revealed separately from base prices,
consumers will underreact to them – and may end up losing a lot of money.
Known as a “full fare advertising rule,” the
regulation appears to be the first national mandate requiring tax-inclusive
pricing.
The economists Sebastian Bradley of Drexel University
and Naomi Feldman of Hebrew University of Jerusalem studied the effects of the
mandate. Their research is highly technical, but the basic lessons are clear:
Airline passengers have been big winners”.
Related:
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Textbook conditions for perfect competition:
A perfectly competitive setting is typically
characterized by the following four characteristics:
- Firms sell a standardized product
- Firms are price takers
- Free entry and free exit (with perfectly mobile factors of production in the long run)
- Firms and consumers have perfect information