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13 May, 2016 - 13:23

Deregulation means the relaxation or removal government controls over industries that were thought to be either "natural monopolies", such as telephones, or essential public services like airlines and trucking. When regulated, industries got protection against renegade competition. For 40 years, the US Civil Aeronautics Board (CAB) barred the creation of any major new airline and carriers could fly only over routes awarded them by the CAB.

With time, the bargain grew increasingly bad. Insulated from competition, regulated industries had little reason to lower costs. They concentrated on influencing the regulators to make favorable decisions. There was an unhealthy tension and costs rose, industries sought price increases, and regulators resisted, often depressing industry profits. That, in turn, reduced new investment and perpetuated high costs and poor service.

Industries such as the airlines, banking railroads, communications, and trucking have long been subject to government regulation. A market place shock wave hit industries as they were deregulated. Each of these industries saw the birth of many new competitors attempting to take advantage of market opportunities uncovered by deregulation. For example, US Airways Midway, People Express, AirCal, Golden West, Muse Air, and Texas Air all started after the airline industry was deregulated. Not all of them survived. The result was that competition intensified, prices were lowered (sometimes below cost), and many once-stable organizations suffered huge financial losses.

As deregulation unfolded—new competition was permitted, rate regulation was loosened or abandoned—the vicious cycle began to reverse itself. For example, AT&T had been slow to adopt fiber-optic cable. In 1985, there were only 352,000 km of it in AT&T's system. Sprint and MCI had more. AT&T responded. By 1994, it had 3.3 million kilometers of fiber cable (slightly more than MCI and Sprint). Airlines, freed of the CAB's routine restrictions, organized and "hub and spoke" systems—outing passengers via major transfer points that provided more connections. In 1978, about 14 per cent of all passengers had to change airlines to reach their destination; by 1995, this number fell to about 1 per cent.4