Silviase/jgov_v1.4_full_ann huggingface dataset:
#### 4. PRIVATIZATION AND DEREGULATION OF AIRLINES A. DEREGULATION PROCESS

Airlines industry is competitive by nature, but here again Prof. Perl points out that discrepancy between price and cost caused by cross-subsidies from dense traffic routes to local routes may have led to a pressure for regulatory reform.

#### A.1. Deregulation in the USA

In the US, before the deregulation 16 carriers had been granted certificates to operate at major routes, and new entrants had not been licensed for trunk routes. Rate-making had been regulated based on the fully distributed cost (FDC) scheme with cross-subsidies between routes. Instead of price competition, carriers competed in services such as flight frequency and number of seats available.

Criticism of regulation by economists began as early as in the 1950s. Finally in 1978 the Airline Deregulation Act passed the Congress, eliminating entry and exit regulations and price regulations. One characteristic of the deregulation process was that the Civil Aeronautic Board (CAB), the regulatory body, itself conducted the deregulation. After all the market regulations were phased out, the CAB was abolished in 1985.

##### A.2. Privatization and deregulation in the U.K

In U.K., in the late 1970s British Airways' management performance deteriorated sharply. Thatcher Administration initiated an examination of BA privatization. In 1981, considering future privatization, a major management restructuring of BA started, and significantly improved its performance by reducing its employment by one-third. In 1987 BA was privatized by selling all the BA shares held by the Government to the public. Besides the privatization, substantial regulatory relaxation was also conducted, abolishing route licenses and domestic fare regulations.

Since pre-privatization period the basic stance of the U.K. Government was the “multirailier policy” to stimulate competition. However, the Government also often tried to restrict competition to protect BA to maintain and strengthen its competitiveness. As a result, the scope of competition was fairly limited, and the second largest carrier British Caledonian Airways (BCal) failed in 1986 and was acquired by BA.

#### A.3. Japan’s regulatory reform

In Japan, due to entry regulation by licensing and price approval based on the same-fare-for-same-distance rule, competition was suppressed, and fare reduction and service improvement were limited. In 1986 a regulatory reform was carried out. It included the system of multi-airline operation in busy routes (“double- and triple-tracking”). This policy did widen the choice of passengers, but fundamentally it was a regulatory revision in the context of existing regulatory framework, and thus it was just the reallocation of vested rights held by incumbent airlines. As for fare, in the early 1990s, though the normal ticket fares in Japan and the US for routes of similar
distance were roughly identical, discount fares in the US were one-half to one-fourth of those in Japan. In 1994 the Civil Aeronautics Law was amended to relax the regulation on fare discount up to 50% from approval to notification.

### B. MARKET PERFORMANCE SINCE REGULATORY REFORMS

#### B.1. Performance in the USA

In the US, the number of airlines doubled after the deregulation, then turned to decrease. This caused concern that deregulation might lead to market concentration. However, airlines actually compete in each route. The average number of carriers in one route has been increasing trend, suggesting competition has become more active. Fares have lowered significantly. According to Prof. Morrison's counter-factual analysis, in 1993 the actual fare was 22% lower than if regulations had been maintained. Hub-and-spoke system brought about higher flight frequency, which, by some economists, account for a major part of consumer welfare gain of airline deregulation. Airline employment in total increased by 80% from 1976 to 1993, though thousands of workers lost their jobs each time of bankruptcy and disappearance of major carriers.

##### B.2. Performance in the U.K

In the U.K. deregulation failed to attain enough competition in the airline market, and BA's market dominance persists. Besides, management restructuring of BA that originated in 1981 has proved very successful. Its fares have declined steadily since the mid-1980s, and its productivity has risen. The BA's profitability improved and recorded positive profit even in the early 1990s when many other major airlines in the world turned to red ink. Though competition was not enhanced domestically, competition among European carriers have become active.

#### B.3. New sources of concern for emergence of market power

In the USA, potential problems are argued that could lead to market dominance of large airlines, namely, hub-and-spoke system, frequent flyer programs, computer reservation systems, and travel agent commission. These systems could potentially influence behavior of passengers and travel agents, thus could artificially create the economies of scale. Prof. Morrison points out, among others, that the frequent flyer programs could cause a client-agent problem for business travelers, that is, a business passengers could seek a larger FF premium irrespective of flight fare because the fare is paid by his/her employer.

For the time being, though, there is little evidence that these systems are raising market concentration or strengthening large carriers' ability to raise their fares. Some insist on introduction of regulations on these problems, but considering rapid change in marketing technology, such as the case of a US airline offering direct telephone reservation at the company, bypassing travel agents, it would be inadequate to hastily introduce rigid regulations.
#### B.4. Japan’s performance

In Japan, after the regulatory change in 1986, profitability of airline companies became unstable, due to cost increase and real revenue loss. Its impact was apparently different from one airline to another.

Prof. Yamauchi and Prof. Murakami estimate that, if the current artificial fare structure based on cross-subsidies were abandoned and cost-based fares were employed, passengers of long-haul and trunk routes would gain, and those of short-haul and local routes would lose. In total, consumer surplus would increase by seven billion yen.

As fare competition has been suppressed, passengers tended to choose airlines that offer more service frequency and more available seats, and airlines have competed in such services. Service competition under price regulation is generally apt to cause excess capacity and resultant misallocation of resources. In case of Japan's regulatory change, an econometric analysis by the two Professors concludes that in some routes excess capacity may possibly have emerged, but that flights in "triple-tracking" routes and in "double-tracking" routes whose one terminus is Haneda (Tokyo) or Itami (Osaka) showed congestion rather than excess capacity, suggesting the necessity of capacity expansion of the busy airports.

#### B.5. Airport capacity restriction

Japan’s airport restriction is always emphasized, but the U.K. case is more or less similar to Japan’s. According to Prof. Yarrow, London airports, in particular London Heathrow Airport, are much congested. Access to Heathrow used to be allocated to airlines with the actual prior to 1977 record of access, as an exception of liberalized route entry. Even after the abolition of this constraint in 1991, it is suspected that slot allocation is carried out preferring vested rights. Some European and American airlines abandoned their intention to access London airports and successfully opened services to other major British cities such as Manchester and Liverpool.

### 5. DREGULATION OF TRUCKING

#### 5.1. Deregulation in the USA

In the USA, the Federal Government (ICC) regulates interstate trucking and State governments cover intrastate ones. $ ^{1} $ As for interstate trucking, until the 1970s strict entry regulation
was carried out, particularly on common carriers that provide services to general customers. An applicant to new entry was obliged to prove contribution to public interest and necessity of its service as well as its ability and adequacy, and was very difficult to be licensed. Fares were to be registered with the ICC and the ICC could reject them if necessary. For the purpose of fare registration and public notice, trucking companies formed rate bureaus region by region and collectively determined their fares.

Relaxation of entry regulation had gradually progressed through court judgments and ICC procedures. Then in 1980 the Motor Carrier Act substantially relaxed entry licensing regulations, getting rid of requirements to prove necessity or public interests. The fare regulation scheme was not modified, but the rate bureau systems became increasingly nominal, and big discount became common.

The number of interstate carriers doubled during the 1980s, and most of the new entry were small size carriers. Among large size carriers, market concentration ratio has risen and tendency toward oligopoly is being concerned, but actually carriers actively entered other regions, thus competition in each route has advanced. There is no evidence of decrease in services or fare hike for small communities.

As for intrastate trucking regulated by State governments, the extent of regulation is diverse from roughly no regulation in some States to tight control in another. Some States have conducted major relaxation but as a whole trend toward deregulation is not significant.

##### 5.2. Deregulation in the U.K

In the U.K., until the 1960s, new entry was strictly limited under a business license system. This scheme had been criticized that the regulation made the industry inefficient and that it was useless for promotion of railroad transportation, traffic safety, environmental protection and improvement of traffic congestion. The 1968 Transport Act changed the licensing system from quantity-based to quality-based “operator’s license” system, and thus lowered entry barriers. Significant reduction of accident rate and lowering of fares through enhanced competition were achieved since then.

A significant characteristic of the U.K. trucking market is that the competition is not confined to domestic market but in European wide. Dr. Helen Lawton Smith says the European Commission had an indirect impact on domestic regulation as a result of successfully promoting changes in the regulations governing international haulage and cabotage.

#### 5.3. Deregulation in Japan

In Japan, before the regulatory reform, the trucking industry was regulated under the Road Transportation Law, with licensing based on supply-demand balancing clause and fare approval. The law controlled both freight and passenger carriers, but the implementation of regulation on
trucking was much less tight than on passenger carriers. The Ministry of Transportation approved tariff band, and furthermore, market rates determined on the negotiation basis were said to be dominant. Nevertheless, the existence of the supply-demand balancing clause was problematic. The regulators were often obliged to make decision for issuance of business licenses under insufficient regional information on supply and demand.

One significant event in Japan’s history of public regulations was the success of door-to-door delivery services, which started in 1976. At the initial stage the MOT did not welcome the new service and delayed approval. Still, entrepreneurship overcame and the service grew by 22.7% at annual rate between 1981 and 1993.

The Motor-truck Transport Business Act of 1990 brought about a major regulatory reform of the trucking. This reform was characteristic of the fact that it was carried out as new legislation and that it was conducted without any gaiatsu, or foreign pressure, unlike many other regulatory reforms in Japan. The law replaced business licensing with permission, and fares and charges became subject to notification. Separation of route trucking and area trucking was relaxed somewhat. However, this reform can be seen in some respect just the ratification of the existing state of affairs, because, as already mentioned, even before the regulatory change economic regulations had not been so tight. Finally, the “contingency demand-supply adjustment” clause, a kind of safeguard against regional excess supply, remained.

The regulatory reform was substantial but not complete, and as only a few years have passed since then, its economic effect is still unclear. After the reform the number of area trucking carriers increased while that of special consolidated carriers (trucking service to collect loads from general customers, to consolidate them at a terminal and carry; formerly called route carriers) decreased. The latter might reflect the regulatory relaxation that enabled re-entry easier. The average size of special consolidated carriers expanded, which may show that the regulatory reform encouraged structural transformation of the industry.

According to Prof. Yamauchi's estimation, assuming 10% decline in trucking fare, consumers (shippers') surplus would increase by 1.2 trillion yen.

### 6. GENERAL CHARACTERISTICS OF PRIVATIZATION AND DEREGULATION PROCESSES IN THE THREE COUNTRIES AND IMPLICATION FOR JAPAN

In the previous sections we have summarized industry-by-industry comparisons of privatization and deregulation in the USA, the U.K. and Japan. In this section, we will pick up some general characteristics of privatization and deregulation processes common to the US and the U.K., and seek implications in deregulation policy formation in Japan in the future.

### A. PRAGMATIC APPROACH

The US and the U.K. experiences on privatization and deregulation policies show that, while their policies have been based on such “principles” as promotion of competition and full use
#### B.1. Regulators' behavior

Japan’s regulators are often criticized as resisting regulatory reforms. Prof. Nambu writes “bureaucrats are never entrepreneur and they are usually lacking imagination towards the future.” This might be a nature common to any bureaucracy, but one can point out the following characteristics on Japan’s regulators as compared to the US and the U.K.

First, reviewing the regulatory history surveyed above, they seem to have stronger inclination to maintain their own organization. In the US, the Civil Aeronautic Board (CAB) conducted the airline deregulation and finally abolished itself. In the U.K., at the time of BT privatization a new regulatory body OFTEL was settled, which should have reduced the power of incumbent regulatory agencies at least relatively. $ ^{2} $ In Japan, even in case of major privatization and regulatory reforms, the structure of regulatory agencies were basically intact.

Second, for each regulated industry, a single government agency covers all the regulations. $ ^{3} $ In the US and U.K., two or more regulators often associate with a regulated industry, sharing regulatory power and even competing each other. In the US, in many cases, in addition to Federal government offices and independent regulatory commissions, anti-monopoly authorities, judiciary authorities and State governments can participate in a regulatory process. In the cases of trucking and airline deregulation, the Congress led the process. In Japan, checks and balances hardly work, nor competition for better performance of regulation.

Third, the entire regulatory system may lack transparency, bringing about large uncertainty for regulated companies and businesses seeking new entry. It has been pointed out that regulators often issue indications and guidance not in statutory form or not open to public. If principles of policy stances were not announced, the public would not clearly know regulators' true intention and policy direction. Furthermore, disclosure of information and data related to regulation is poor, insufficient for evaluation of regulatory performance.

#### B.2. Behavior of incumbent businesses and new entrants

Regulated business behavior is also different in Japan from the US and the U.K. In the US, Dr. Perl writes on telecoms, "initially the FCC and the state commissions strongly resisted competitive entry. Reform occurred because competitors (like MCI), seeing profit opportunities, aggressively sought to enter the industry. In many cases, these competitors did not seek regulatory approval for entry, but entered and waited to be challenged. Where necessary, entrants challenged
both regulators and the incumbents in court to secure continued entry on what they regarded as fair terms." In case of US trucking, accumulation of court judgments were a major factor to nominalize entry regulation. In the U.K., initially CATV providers tried hard to enter the telecommunications market, and finally in 1991 the government licensed many CATVs for telecommunications.

In the US, in addition to cultural and social factors, one background of the phenomenon might be that checks and balances and competition work among regulators, as described above.

In Japan, Prof. Nambu writes that top management of regulated firms tend to flatter and obey regulators, and that consensus between them is often conservative and will not welcome innovation. He writes on the other hand that, if regulators combat with regulated industries, there will be a delay or stalemete of important decision making, missing the best opportunity, such as in the case of telecommunications. This phenomenon may partly come from the fact that businesses do not often appeal to court or choose other measures to against regulators.

Door-to-door delivery service was a significant exceptional case in Japan. A regulated trucking firm finally managed to establish the new service in spite of negative attitude of the regulator. As technological innovation emerges and as economic conditions change, the second and the third such new services can show up.

### C. ROLES OF ECONOMISTS

Finally we would mention the roles of economists for promotion of deregulation by means of economic analyses of regulation. In the US, though we should be prudent not to overrate it, economists seem to have played a certain role in the course of the deregulation process. Prof. Alfred Kahn became chairman of the CAB and conducted the airline deregulation. Results of many microeconomic empirical researches on regulation/deregulation influenced arguments in the Congress. $ ^{4} $ In the U.K., Prof. Littlechild's proposal of price cap scheme was widely employed in the price regulation of privatized industries.

In Japan, for the time being, regretfully there have been few cases that economist proposals or analysis results had a major influence on regulatory reforms. One reason was the difficulty in empirical analyses, first because data are hard to obtain, and second because, different from the US case, regulation is uniform nationwide, so the US type cross-section analysis of state data is not available. $ ^{5} $ Impact of analysis results on political decision may be also different from the US case.

Hopefully, economists might well penetrate more to the analysis of practical regulatory decision-making processes. It would be meaningful to enhance economists' voice on regulatory processes to objectively evaluate regulations and to make the process more transparent.
### 7. CONCLUSION

We have compared regulation and regulatory reforms of four regulated industries, telecommunications, electricity, airlines and trucking in the USA, the U.K., and Japan, based on the papers written by the participants of the co-study project.

In Japan, people seem to have respected the regulatory roles of government in the market economy, and put priority on maintenance of current job and incumbent regulators and regulated businesses.

However, Japan’s economic environment will make it difficult to sustain this kind of manner. Japan is facing structural changes, namely, first, prolonged low growth; second, change in Japan’s comparative advantage structure caused by yen rate appreciation and development of newly industrializing economies; and third, higher mobility of labor force. Under such transformation, Japanese businesses must seek to regain competitiveness to cope with new environment, and to cultivate new fields of activity. Facing high price and international price differential, Japanese consumers tended to “exit”, that is, just not to buy unreasonable price items, rather than to “voice” their requests or complaints. Now, businesses, in particular tradable goods industries, voice requests to reform the current regulatory systems that bring about high cost and restriction of activity in the Japanese economy.

On the background of the initiation of regulatory reform in the US and in the U.K. in the 1970s were stagflation and lack of confidence in the future economy. And once the tide of reform started to move, it has not to be stopped. Japanese economy is now in the similar condition, and the opportunity of conducting full-scale regulatory reform is maturing, in reference to the US and U.K. experiences.
3. Comments and Discussion

“Summary of the Symposium $ ^{*} $ Proceedings”

Edited by

Economic Research Institute Staffs
Session 1: Privatization and Deregulation in the U.S.A.

Chair: George YARROW

Paper: Lewis PERL

### 1. DISCUSSANTS' COMMENTS

## SAKAKIBARA:

1. I was struck by similarities of American, British and Japanese experiences. Decline in growth of the government revenue due to slower growth or increased inflexibility of government expenditure, gradual price rise, inflation after oil crisis, and political atmosphere, all contributed to deregulation.

2. In the case of the airline deregulation, there had been continuous technological development, expansion of market and excess capacity all the time in the airline industry. Still, there was no threat of major entries to the industry; no strong complaint from customers. There was a price/cost disparity, but the profits from the longer-hauls between big cities were not large enough to attract entrants. All the people including management and labor opposed to deregulation.

If there was a disparity between the dynamic reality and the static regulations that hampered the development of the industry, the complaint must have come from the airline itself, but there were no complaints. So, why it happened in the 1970s was a mystery. It was more of a historical accident due to political atmosphere.

When the Department of Transportation was established in 1966, there had been large and independent regulatory agencies, and the DOT didn't have much to do. So they made researches and they were all for competition. Therefore, the relations between the DOT and the regulatory agencies has been delicate from the beginning, which may have been a cause of American deregulation.

3. One of the purposes of deregulation or regulatory reform was to reduce the administrative cost. Is there anyone who did a careful study of how much cost of administering these industries is reduced and how much saving is done by deregulation and regulatory reforms?

4. Regarding the international implication of deregulation, according to Tae-Oum, the Japan Air Lines' cost per seat/miles was 50% higher than the United States, so the market should be liberalized. But we need to make a little longer and dynamic consideration. As yen rate changes, the cost situation is changing all the time. So, I was very much dissatisfied with this kind of discussions. But we need to discuss international implications of deregulation started in the U.S. or in the U.K. or whatever developing countries.