Deadweight losses can be understood as the cost of market inefficiency stemming from the imbalance between supply and demand. When supply exceeds the demand for a substantial amount of time, the product becomes undervalued. In contrast, the situation in which demand is notably higher than supply results in product value inflation. In the former case, the producer sustains losses since the profit barely covers production costs. In the latter case, consumers of the product suffer because the producers can exploit high demand and increase prices.
Regarding the airline industry, monopolies enjoyed the inflated fares prior to deregulation. The deadweight losses were inflicted on the consumers who had to use the services of one of the government-allocated airlines. However, deregulation helped alleviate market inefficiency and establish balance in the industry. The “open skies” policy made the market more contestable, which resulted in lower fares. For instance, the first ten years of airline deregulation in the U.S. saved consumers approximately $100 billion. Overall, the product value was returned to its natural condition, and deadweight losses were reduced.
However, the consumers were the most obvious but not the sole beneficiary of airline industry deregulation. Low-cost carriers (LCCs) have got an opportunity to enter the market and compete against the large hub-and-spoke carriers. These airlines offered an affordable product for city-to-city routes, which further reduced the deadweight losses for the consumers. Such a business model would be impossible in the pre-deregulation industry, which makes LCCs the second beneficiary of the “open skies” policy.