Where is this? In much of the US, there are only two airlines. Some lucky Americans might get to pick from three or four airlines. Airlines in the US are not really competitive in any meaningful way - https://www.economist.com/leaders/2017/04/22/a-lack-of-compe...
All American Airlines has to do is announce they're eliminating seats, and Delta and United would probably match them within 3 to 6 months.
Yes, in a free market. Airlines are expensive and heavily regulated. And regulators are subject to capture (ref: FAA and 737-MAX problems). Which means there are major barriers to building a new airline.
I suspect it's actually much more profitable for airlines to follow the profit-seeking lead of a competitor. E.g. if Delta rolled out the standing seats for their current price, I suspect we'd see United and American follow. You don't have to look too far to see that's been the case with other "conveniences" like bag check fees, bag weight limits, seat selection fees, food for sale instead of being included in the price, etc.