Net Neutrality: Let’s Hold a Hearing!
A consistent narrative in the Net Neutrality debate is that no one should worry about suppression of beneficial business practices because the FCC can always examine business plans case by case and allow the good ones.
This is one of the world’s truly bad ideas. A major reason for relying on the institutions of property rights and markets is to avoid dreary proceedings conducted case by case under no discernible standards.
I like to illustrate this point with an example from a field not commonly thought of as embodying property rights — airline seats, and Alfred Kahn‘s great solution to the over-booking problem:
The time for this scenario is sometime before 1978. Suppose I am an airline agent for a flight due to leave. It has ninety-nine seats, but we have sold one hundred tickets, so someone must be bumped. I must decide who, and I am charged with making a decision that is just and fair. Clearly this will not be easy. I must interview all one hundred passengers to determine their individual reasons for traveling and decide whose need is least worthy. Some of the passengers may lie to me, so I need to investigate suspicious stories. Perhaps each deserves a chance to investigate all the stories of all the others and to introduce evidence of lying, or to bring in witnesses as to the urgency of his or her journey. We will have hearings! They can hire lawyers! This could take a while, but who can object to delays in the name of Justice? And I am not going anywhere.
Real-life airlines are interested in quick departures more than perfect Justice, so their approach to bumping was more direct. As the agent, I would pick someone and say ‘Sorry.’ Randomness might seem fair, but there were other considerations. The prosperous-looking woman with the expensive briefcase might complain to the airline president and cost me my job. She was not in the draw for the black ball. The tough-looking gent picking his teeth with a bowie knife might impose other kinds of costs on me personally, so let’s not bump him. Airline agents were instructed in the art of choosing victims. Elderly people were regarded as less likely to make trouble, so they were a preferred category. The one certainty was that the chosen sacrifice would be angry. In an effort to avoid inflicting this pain on passengers and on themselves, the airlines tried to underbook, allowing an ample safety margin for no-shows. Often the planes took off with empty seats that could have been filled. This cost the airlines money and raised ticket prices.
The system changed in 1978 through an act of creative government. The Civil Aeronautics Board, acting at the prodding of economist Julian Simon, required airlines to institute a ‘voluntary bumping’ system. This meant that they were required to offer to pay bumpees. If the airline sells too many seats it offers money to anyone who will give up her seat on the next flight out. If not enough takers appear, the offer is raised until a sufficient number of passengers volunteer. The underlying structure of the deal is that the airline gives each ticketed passenger a property right in his seat, and if it overbooks, it buys this right back at a price satisfactory to the passenger.
The results please everyone. Almost 700,000 passengers profited from a buy-back payment in 1993. By definition, they are happy because they wanted the money more than they wanted the seat on that flight. They were also spared the ignominy of having their fate decided by the whim of airline passenger agents without knowledge of individual needs. All the people not bumped are happy, or would be if they knew of their escape. The airlines are able to increase overbooking, which raises their load factors. This makes their stockholders happy indeed. Fares have gone down, to the joy of the traveling public. Ticket agents do not get grief from bumpees, which improves their lives. Particularly vulnerable people have ceased to be special targets for bumping. No one has claimed damage from the system. The net result is that the new system of making an airline seat into property is an improvement on the old system of random bumping in every possible dimension — Justice, Economic Efficiency, Political Freedom, and Personal Autonomy — and it all results from creating a property right. Who, given the choice, would substitute a system where a passenger agent, however capable and earnest, is charged with finding ‘Justice’?”
James V. DeLong, Property Matters: How Property Rights Are Under Assault — And Why You Should Care (Free Press, 1997), pp. 49-50.