6 ms·

A different way to think about this, which isn't presented in the article. For every new airplane manufacturer, there are huge additional fixed costs. Why doe

A different way to think about this, which isn't presented in the article. For every new airplane manufacturer, there are huge additional fixed costs. Why does the world need two very similar planes, such as the Boeing 737 and the Airbus A320? If there was only one plane manufacturer, the plane development costs would roughly halve. And of course, if there is to be a third manufacturer that produced a 737/A320 competitor, the worldwide total plane development costs would increase by 50%! To put some example numbers here: say there is a total demand for 100 planes to be bought, and it costs $1000 for Boeing and Airbus each to develop their own plane. That means the total fixed development costs per plane are $1000 * 2 / 100 = $20. Now let's say a third manufacturer enters the market, and each company will get 33.3 of the 100 plane orders. Now fixed development costs per plane are $1000 * 3 / 100 = $30. The fixed cost per plane actually increased 50% with a new competitor! I'm not saying that we should only have one airplane company - as market forces usually not work well with monopolies. I'm only saying that increasing competition is not always good for consumers. More info: https://www.investopedia.com/terms/n/natural_monopoly.asp https://www.investopedia.com/terms/n/natural_monopoly.asp

JumpCrisscross 8y ago
This is (the person) J.P. Morgan’s “ruinous competition” hypothesis. It is not borne out by the literature. Competition attracts investment while reducing volumes; it works because through a combination of innovation and accepting lower returns, prices are reduced.
tysonzni 8y ago
Increasing returns to scale isn't the only way unit costs can go down. Competitive forces typically incentivize companies to come up with new ways to increase productivity and reduce cost. Having even one competitor is enough to meaningfully reshape the incentives of a monopolist. But you may well be right about the negative utility of having 4 vs 3 companies in this particular industry.
raquo 8y ago
That argument doesn't really hold water when applied to aircraft manufacturing. Commercial jets are not indistinguishable commodities, there is a ton of variation in design and mission ideologies (control systems, materials, hub-and-spoke vs point-to-point, etc.) The type of goods and barriers to entry are more similar to e.g. car manufacturing than to utilities like ISPs. If Boeing and Airbus weren't artificially inflating administrative barriers to entry we'd definitely have more competition, and consumers would benefit, not suffer.
- stlHusker 8y ago
  "If Boeing and Airbus weren't artificially inflating administrative barriers to entry we'd definitely have more competition, and consumers would benefit, not suffer." From the article: "For Bombardier, development of its new C-Series of planes took more time and more money - $6 billion in all - than it had anticipated, requiring what amounted to a bailout from the governments of Canada and Quebec." Stop and parse that for a second.
  - raquo 8y ago
    So? Big aircraft cost a lot of money and bring in a lot of money. Projects incur significant cost overruns in literally every industry.
henvic 8y ago
Austrian economists don't see this leadership as monopolistic. Instead, they rather call monopoly when there are state apparatus being used to restrict competition. Basically, there is no evil doing in being a leader. This is clearly not the case for Boeing and Airbus because both have ties with military and state actors, but maybe in a free-market scenario it wouldn't be so different to what we have today. https://www.youtube.com/watch?v=t01bAJFbGb4 https://www.youtube.com/watch?v=t01bAJFbGb4
- hexane360 8y ago
  Is there any formal distinction those economists make, or is it just a matter of "pretend it doesn't exist by calling it by a different name"? Natural monopolies can and do exist in markets as close to free as we can get.
  - icebraining 8y ago
    No, it's not a matter of names; the Austrian school (not to be confused with economists from Austria) claims they don't actually exist, and that the examples usually given can be explained by governmental manipulation. "There is no evidence of the "natural-monopoly" story ever having been carried out — of one producer achieving lower long-run average total costs than everyone else in the industry and thereby establishing a permanent monopoly." https://mises.org/library/myth-natural-monopoly https://mises.org/library/myth-natural-monopoly
  - barry-cotter 8y ago
    If you can come up with a historical example of a natural monopoly you’ll have done better than the entire economics profession at doing so. We have many examples of local monopolies, government granted monopolies and companies getting very large shares of an industry by driving up quality and driving down prices but no unambiguous examples of natural monopolies arising in competitive markets. Large fixed costs and low marginal costs are usually cited as preconditions of natural monopoly but the US supports DHL, FedEx, UPS and the US postal service. Many municipal markets have had multiple competing utilities for multiple decades.
walrus01 8y ago
> Why does the world need two very similar planes, such as the Boeing 737 and the Airbus A320? If there was only one plane manufacturer traditional economist answer: without competing market forces, there would be no pressure for innovation? the high efficiency engines that customers have pressed for from the engine manufacturers, and other improvements which resulted in the 737MAX and a320NEO would not exist if there was a single monopoly small airplane. If there was a single monopoly small airplane people would probably be still flying around in a level of technology/fuel efficiency similar to a legacy 737-400.
- tnzn 8y ago
  Well, competition isn't the only incentive that can drive innovation though. In the case of public research, it can do quite the opposite.
  - da02 8y ago
    Can you expand on this? This sounds very intriguing.
    - deleted 8y ago
      [deleted]
    - tysonzni 8y ago
      It sounds like Peter Thiel's argument about how natural monopolies can afford to invest heavily in R&D because they're financially comfortable. And how competitive industries supposedly don't offer the same room for research. I think he's mistaken on this but nonetheless it's a compelling argument in some cases. Here's his essay where he expands on it: https://www.wsj.com/articles/peter-thiel-competition-is-for-losers-1410535536 https://www.wsj.com/articles/peter-thiel-competition-is-for-...
  - heartles 8y ago
    There's also an argument to be made for Bell labs, back when Bell had a monopoly on the phone lines there were some amazing developments to come out of Bell Labs
da02 8y ago
However, things get more complicated when you look at the other factors: fuel efficiency, cabin air pressure & humidity (related to jet lag symptoms), fuel price swings, etc. Innovations and new discoveries somehow bring down the cost despite an increase of competitors. Having multiple competitors provide an alternative when one company chooses a design that has unforeseen problems: https://www.reuters.com/article/us-rolls-royce-hldg-engines/rolls-royce-and-airlines-grapple-with-further-dreamliner-engine-issues-idUSKBN1HK0L6 https://www.reuters.com/article/us-rolls-royce-hldg-engines/... The "second-to-market" might also learn from the mistakes of the "first-to-market". This happened when IBM entered the PC industry in the early-80s. Compaq and DELL later when on to find ways to sell PCs cheaper than IBM. Boeing is having trouble with some of the engines of the 787 (Dreamliner). It might have something to do with the bleedless air system they chose. While Airbus went a different direction with their A350. Boeing chose to use composite materials to save on weight and allow for more air pressure and humidity. Airbus followed up with the A350 because of the Dreamliner popularity, but chose a more conservative design in some areas. Either way, the airlines that buy (ie finance) either one will save on fuel costs compared to previous models. With the "increased cost" of more than one competitor, airlines have a choice to help them deal with risks of a new design... and adapt to changing market conditions. (Disclaimer: I am not an engineer or economist.) Soviet Union bureaucrats also thought like this: Too many competitors is inefficient. We will save resources if we just have one shoe provider. Cut to the future: Russians notice how tiny Japan can build a better television than the might of the entire Soviet Union: http://articles.latimes.com/1987-02-01/local/me-580_1_television-sets http://articles.latimes.com/1987-02-01/local/me-580_1_televi...
- walrus01 8y ago
  > Boeing is having trouble with some of the engines of the 787 (Dreamliner). if you really want to see "new engine trouble", compare the following engines' sales and recalls: shitty engine, skip down to the engine removals section: https://en.wikipedia.org/wiki/Pratt_%26_Whitney_PW1000G https://en.wikipedia.org/wiki/Pratt_%26_Whitney_PW1000G non shitty engine: https://en.wikipedia.org/wiki/CFM_International_LEAP https://en.wikipedia.org/wiki/CFM_International_LEAP the CFM1000 has been a nearly unmitigated disaster for PW. Massive defects and removals from aircraft/recalls. It's reflected in its sales numbers compared to the LEAP as well.
maxerickson 8y ago
Ownership/leasing costs are apparently only ~20% of airline costs¹. A big chunk of that will be the cost of manufacturing the plane. So the actual fixed costs aren't that bad. 1. about 40% of direct flight costs, which are 50% of overall costs: https://www.icao.int/MID/Documents/2017/Aviation%20Data%20and%20Analysis%20Seminar/PPT3%20-%20Airlines%20Operating%20costs%20and%20productivity.pdf https://www.icao.int/MID/Documents/2017/Aviation%20Data%20an...
- tuna-piano 8y ago
  Meh. To that same point though, Boeing's net profit margin is only around 10%. Of course, 10% is pretty typical of any company, and doesn't seem to be any kind of huge amount coming from duopoly power. Compare to Visa, which has more like a 50% profit margin. ...But even if you considered all of that 10% profit margin comes from the powers the duopoloy affords them, then that's only 2% of airline costs (10% Boeing profit * 20% of airline cost).
- dx034 8y ago
  Ownership costs are so low because utilisation has been improved greatly over the past decades. Especially short-haul planes are now in the air for 14-16h or more. That over a life-time of two decades or more reduces the per-flight cost to a minimum.
rukittenme 8y ago
This is a well known economic fact and points to why economic niches rapidly form monopolies. These monopolies, once entrenched, can never be dislodged thanks to their economies of scale. > The average lifespan of a company listed in the S&P 500 index of leading US companies has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today, according to Professor Richard Foster from Yale University. Oh.
starpilot 8y ago
Isn't this the motivation between all centrally-planned economies? No duplicated effort, maximum efficiency. Of course in a free market, the one company just ends up raising its prices to maximize profit; see ULA being the one viable rocket company prior to SpaceX.

JumpCrisscross 8y ago

This is (the person) J.P. Morgan’s “ruinous competition” hypothesis. It is not borne out by the literature. Competition attracts investment while reducing volumes; it works because through a combination of innovation and accepting lower returns, prices are reduced.

tysonzni 8y ago

Increasing returns to scale isn't the only way unit costs can go down. Competitive forces typically incentivize companies to come up with new ways to increase productivity and reduce cost. Having even one competitor is enough to meaningfully reshape the incentives of a monopolist. But you may well be right about the negative utility of having 4 vs 3 companies in this particular industry.

raquo 8y ago

That argument doesn't really hold water when applied to aircraft manufacturing. Commercial jets are not indistinguishable commodities, there is a ton of variation in design and mission ideologies (control systems, materials, hub-and-spoke vs point-to-point, etc.) The type of goods and barriers to entry are more similar to e.g. car manufacturing than to utilities like ISPs. If Boeing and Airbus weren't artificially inflating administrative barriers to entry we'd definitely have more competition, and consumers would benefit, not suffer.

stlHusker 8y ago
"If Boeing and Airbus weren't artificially inflating administrative barriers to entry we'd definitely have more competition, and consumers would benefit, not suffer." From the article: "For Bombardier, development of its new C-Series of planes took more time and more money - $6 billion in all - than it had anticipated, requiring what amounted to a bailout from the governments of Canada and Quebec." Stop and parse that for a second.
- raquo 8y ago
  So? Big aircraft cost a lot of money and bring in a lot of money. Projects incur significant cost overruns in literally every industry.

henvic 8y ago

Austrian economists don't see this leadership as monopolistic. Instead, they rather call monopoly when there are state apparatus being used to restrict competition. Basically, there is no evil doing in being a leader. This is clearly not the case for Boeing and Airbus because both have ties with military and state actors, but maybe in a free-market scenario it wouldn't be so different to what we have today. https://www.youtube.com/watch?v=t01bAJFbGb4 https://www.youtube.com/watch?v=t01bAJFbGb4

hexane360 8y ago
Is there any formal distinction those economists make, or is it just a matter of "pretend it doesn't exist by calling it by a different name"? Natural monopolies can and do exist in markets as close to free as we can get.
- icebraining 8y ago
  No, it's not a matter of names; the Austrian school (not to be confused with economists from Austria) claims they don't actually exist, and that the examples usually given can be explained by governmental manipulation. "There is no evidence of the "natural-monopoly" story ever having been carried out — of one producer achieving lower long-run average total costs than everyone else in the industry and thereby establishing a permanent monopoly." https://mises.org/library/myth-natural-monopoly https://mises.org/library/myth-natural-monopoly
- barry-cotter 8y ago
  If you can come up with a historical example of a natural monopoly you’ll have done better than the entire economics profession at doing so. We have many examples of local monopolies, government granted monopolies and companies getting very large shares of an industry by driving up quality and driving down prices but no unambiguous examples of natural monopolies arising in competitive markets. Large fixed costs and low marginal costs are usually cited as preconditions of natural monopoly but the US supports DHL, FedEx, UPS and the US postal service. Many municipal markets have had multiple competing utilities for multiple decades.

walrus01 8y ago

> Why does the world need two very similar planes, such as the Boeing 737 and the Airbus A320? If there was only one plane manufacturer traditional economist answer: without competing market forces, there would be no pressure for innovation? the high efficiency engines that customers have pressed for from the engine manufacturers, and other improvements which resulted in the 737MAX and a320NEO would not exist if there was a single monopoly small airplane. If there was a single monopoly small airplane people would probably be still flying around in a level of technology/fuel efficiency similar to a legacy 737-400.

tnzn 8y ago
Well, competition isn't the only incentive that can drive innovation though. In the case of public research, it can do quite the opposite.
- da02 8y ago
  Can you expand on this? This sounds very intriguing.
  - deleted 8y ago
    [deleted]
  - tysonzni 8y ago
    It sounds like Peter Thiel's argument about how natural monopolies can afford to invest heavily in R&D because they're financially comfortable. And how competitive industries supposedly don't offer the same room for research. I think he's mistaken on this but nonetheless it's a compelling argument in some cases. Here's his essay where he expands on it: https://www.wsj.com/articles/peter-thiel-competition-is-for-losers-1410535536 https://www.wsj.com/articles/peter-thiel-competition-is-for-...
- heartles 8y ago
  There's also an argument to be made for Bell labs, back when Bell had a monopoly on the phone lines there were some amazing developments to come out of Bell Labs

da02 8y ago

However, things get more complicated when you look at the other factors: fuel efficiency, cabin air pressure & humidity (related to jet lag symptoms), fuel price swings, etc. Innovations and new discoveries somehow bring down the cost despite an increase of competitors. Having multiple competitors provide an alternative when one company chooses a design that has unforeseen problems: https://www.reuters.com/article/us-rolls-royce-hldg-engines/rolls-royce-and-airlines-grapple-with-further-dreamliner-engine-issues-idUSKBN1HK0L6 https://www.reuters.com/article/us-rolls-royce-hldg-engines/... The "second-to-market" might also learn from the mistakes of the "first-to-market". This happened when IBM entered the PC industry in the early-80s. Compaq and DELL later when on to find ways to sell PCs cheaper than IBM. Boeing is having trouble with some of the engines of the 787 (Dreamliner). It might have something to do with the bleedless air system they chose. While Airbus went a different direction with their A350. Boeing chose to use composite materials to save on weight and allow for more air pressure and humidity. Airbus followed up with the A350 because of the Dreamliner popularity, but chose a more conservative design in some areas. Either way, the airlines that buy (ie finance) either one will save on fuel costs compared to previous models. With the "increased cost" of more than one competitor, airlines have a choice to help them deal with risks of a new design... and adapt to changing market conditions. (Disclaimer: I am not an engineer or economist.) Soviet Union bureaucrats also thought like this: Too many competitors is inefficient. We will save resources if we just have one shoe provider. Cut to the future: Russians notice how tiny Japan can build a better television than the might of the entire Soviet Union: http://articles.latimes.com/1987-02-01/local/me-580_1_television-sets http://articles.latimes.com/1987-02-01/local/me-580_1_televi...

walrus01 8y ago
> Boeing is having trouble with some of the engines of the 787 (Dreamliner). if you really want to see "new engine trouble", compare the following engines' sales and recalls: shitty engine, skip down to the engine removals section: https://en.wikipedia.org/wiki/Pratt_%26_Whitney_PW1000G https://en.wikipedia.org/wiki/Pratt_%26_Whitney_PW1000G non shitty engine: https://en.wikipedia.org/wiki/CFM_International_LEAP https://en.wikipedia.org/wiki/CFM_International_LEAP the CFM1000 has been a nearly unmitigated disaster for PW. Massive defects and removals from aircraft/recalls. It's reflected in its sales numbers compared to the LEAP as well.

maxerickson 8y ago

Ownership/leasing costs are apparently only ~20% of airline costs¹. A big chunk of that will be the cost of manufacturing the plane. So the actual fixed costs aren't that bad. 1. about 40% of direct flight costs, which are 50% of overall costs: https://www.icao.int/MID/Documents/2017/Aviation%20Data%20and%20Analysis%20Seminar/PPT3%20-%20Airlines%20Operating%20costs%20and%20productivity.pdf https://www.icao.int/MID/Documents/2017/Aviation%20Data%20an...

tuna-piano 8y ago
Meh. To that same point though, Boeing's net profit margin is only around 10%. Of course, 10% is pretty typical of any company, and doesn't seem to be any kind of huge amount coming from duopoly power. Compare to Visa, which has more like a 50% profit margin. ...But even if you considered all of that 10% profit margin comes from the powers the duopoloy affords them, then that's only 2% of airline costs (10% Boeing profit * 20% of airline cost).
dx034 8y ago
Ownership costs are so low because utilisation has been improved greatly over the past decades. Especially short-haul planes are now in the air for 14-16h or more. That over a life-time of two decades or more reduces the per-flight cost to a minimum.

rukittenme 8y ago

This is a well known economic fact and points to why economic niches rapidly form monopolies. These monopolies, once entrenched, can never be dislodged thanks to their economies of scale. > The average lifespan of a company listed in the S&P 500 index of leading US companies has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today, according to Professor Richard Foster from Yale University. Oh.

starpilot 8y ago

Isn't this the motivation between all centrally-planned economies? No duplicated effort, maximum efficiency. Of course in a free market, the one company just ends up raising its prices to maximize profit; see ULA being the one viable rocket company prior to SpaceX.