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Regulation and the Nature of the Firm: The Case of U.S. Regional Airlines

In his pathbreaking article “The Nature of the Firm,” Ronald H. Coase postulated that the structure of production was determined by the comparative advantage between contracting and hierarchy in securing and coordinating complementary resources for production. While Coase considered the possibility that regulation might also influence the way production is structured, he considered the problem only very generally. This paper suggests that airline deregulation has profoundly affected the structure of firms that operate airline networks by affecting contractual conditions under which airlines purchase labor inputs, removing constraints on the extent and nature of the firm’s route network, and changing the competitive environment in which airline firms operate. Where a stable uniform firm structure existed under regulation, airline networks now are organized with a variety of firm structures, and individual networks have changed as particular conditions have changed over time. No single structure dominates, although some are more common than others.