This post by Orin Kerr about the history of airplane screening was interesting. Even more interesting, though, was the debate about hijacking and markets that opened up in the comments.
In mockery (I think), one commenter wrote:
You mean the market didn’t solve the hijacking problem, and that a (shudder) regulation was needed. Careful, Orin, you are about to be excommunicated.
I’m not sure I follow. Hijacking is the nonconsensual interference with property and security interests of another, not a market transaction: Does anyone argue that the market can solve crimes like hijacking?
But as still later commenters pointed out, the market argument is actually a bit of a puzzle. Hijacking is of course a non-market transaction, but buying a ticket and getting on a plane is, and my understanding is that very few hijackers forced their way onto the airplanes from the gate or the tarmac. The airlines that sell tickets and fly planes presumably don’t want their planes to be hijacked, so they have some incentives to screen their passengers, forbid the bringing of weapons on board, etc. So why didn’t they? Why was there such a sudden drop-off in hijacking only once there was a government mandate about how airlines must screen their passengers before boarding a plane? What’s the market failure?
Comments
I’m not convinced that hidden fees are good for you. The argument for hidden fees is similar to the argument for Internet micropayments. Internet micropayments fail because of the mental transaction cost; charging the user many times for many small items requires the user to make decisions about each item individually, and this decision making is itself a cost. Instead, customers prefer fixed pricing. Goods that are sold per small item are generally limited to situations like utilities where the goods-seller has a monopoly.
Posted by: Ken Arromdee | Nov 4, 2009 2:36:45 PM
This gets us a little far afield from airports, but let me respond to David’s point about Gabaix & Laibson. I agree that their theory has some trouble explaining the existence of “no hidden fees” advertising, which is a feature not only of Southwest’s campaign but also a lot of promotional material one sees from credit unions. One explanation internal to their theory (which they mention in a footnote) is that they do expect some advertising where the industry is very concentrated ((because their story is in part about the fact that de-biasing creates positive externalities for competitors). So maybe Southwest doesn’t have many competitors on a lot of its routes, but competition was more vigorous in the early 70’s.
G & L also assume that hidden fees result in cross-subsidies for sophisticates, so that sophisticates will actually be drawn to firms with hidden fees. Thus, they think it is dumb to advertise that you have no hidden fees, b/c the sophisticates will stay away, while others will simply go “huh? what hidden fees?” But that assumes that there are only two groups. There might be a third group who are hard to mislead with hidden fees but who are unaware that hidden fees are good for them — I’ll call them “swingers,” because they’re money and they don’t even know it. These are the people Southwest might be targeting. That’s especially likely if cross-subsidies are low, so that swingers may outnumber sophisticates.
So, um, what does this have to do with hijacking? Eh, maybe nothing. (E.g., I agree with David’s analysis of point 2.) But my point is only that the fact that there is some advertising about low-salience information does not necessarily prove that all such advertising would have been effective in a different market setting.
Posted by: BDG | Nov 3, 2009 3:21:06 PM
Orin Kerr’s response was curious and to me suggested he didn’t think things out. The free market approach favored by many around that blog surely do think that it can deal with various things now prosecuted as crimes. This then takes us to discussion of possible ways markets might provide a solution. The potential options underlines there might be some.
This is not the first time someone sarcastically took a p.o.v. different than the regulars and Kerr was all “huh? what?” … makes it useful to have feedback, I guess.
Posted by: Joe | Nov 3, 2009 2:15:11 PM
I do not necessarily accept the premise that this is an example of market failure.
First, it seems that during this same period there was an active feud between the intelligence agencies of the United States and Cuba to stage hijackings to achieve political objectives (amongst other things) and most of these US hijackings were directly related to Cuba. Nixon apparently ended this practice unilaterally in 1973 and agreed to prosecute these crimes (e.g., cuban nationals hijacking planes to flee to the US). The Cuban government stopped their efforts in response. In other words, the apparent reduction in hijackings may owe more to the cessation of this practice than any security measures that were implemented.
Second, it is not clear that the costs of lax security to the airlines or society were sufficient to justify the costs of implementing the security measures at the time. It seems that the hijackings then generally did not result in death or injury and that the airlines managed to recover their airplanes. In other words, the costs were isolated largely to the diversion of a plane, its crew, and its passengers for a short while. (Was there any evidence of wide spread concern of hijacking in reduce air travel?) On the other hand, there are definite costs to implement security screening, i.e., to re-model airports to accommodate security screening, purchase equipment, staff them, and the delay and discomfort imposed on each passenger by the inspection process.
I am not so sure screening was a good use of funds given the actual risks at the time. Perhaps these calculations would be different now with organized terrorist organizations demonstrating the desire and ability to blow up airplanes and use them as bombs. We can debate whether or not the market could or would do the right thing without government intervention in this case, but I am unconvinced that history demonstrates market failure here.
Posted by: fall99 | Nov 3, 2009 12:34:54 PM
#2 seems the most plausible to me at first glance, but oddly screening only happens at the entrance to terminals in certain countries such as the US. In many airports in Europe, screening is indeed conducted at the individual gates. In other places, e.g., Asia, a full screening is done upon entering the terminal, but a secondary screening is done at the gate. So it would seem that, viewed from a comparative perspective (and certainly hijackings are not a uniquely US problem), economies of scale do not fully explain the market failure, or at least its solution.
Posted by: TM | Nov 3, 2009 12:00:56 PM
Brian — I disagree, although your proposed ad is right out of the movie Crazy People (IIRC, they actually had a poster produced in the movie that was somewhat similar, although about crash records, for an airline.) Contra David Laibson, we see advertising in the airline industry about the price of add-ons — think Southwest’s recent campaign about bag fees — and I can’t see any reason why there wouldn’t be advertising about security if it was an individual airline (“we’ve hired more ex-mossad than our competitors”)
I’m with Will — 1&2, particularly 2. It strikes me that the big thing is the interaction with shared airports. If airlines owned their own airports, they would bear a lot of the cost — all the delayed flights would be theirs, as would any reputational damage (at least pre-9/11, where most of the harm of hijacking was felt inside the system.) But shared airports are more likely to have shirking (once an hijacker makes it into an airport, it’s pretty easy for him/her to sneak onto a plane) and a failure to internalize the externalities. The fact of increasing returns to scale in airport development creates the dynamic, I think.
Does anyone know anything about train hijackings around the turn of the century?
Posted by: D.Schleicher | Nov 3, 2009 9:53:55 AM
Interesting! I think 3. is the most important element. Without 3., you should have a race to the top, as security improvements at one firm drive hijackers to more vulnerable firms. But the effectiveness of security efforts is probably very hard to monitor for customers. So investing in security wouldn’t produce any market returns. Also, you couldn’t really even have a high-risk bargain airline (a la option 4.) because there’s a lemons problem. If the only problem with getting returns on security investments were that it was costly for customers to acquire the information (as opposed to determining whether the information was credible), maybe advertising could have overcome that barrier. But firms couldn’t easily advertise their improved security without also raising the salience of the danger of hijacking. “Pan Am: now somewhat less likely to get you killed by masked gunmen than Eastern!”
What are the differences, if any, between hijacking and, say, web site security for financial data?
Posted by: BDG | Nov 3, 2009 9:30:31 AM