I see the problem a little differently: it seems to me (an American based in London) that the problem is that there isn't any way for the market to push airlines towards better service. Yes, you can fly business class, but the gap between economy fares and business is so large that it doesn't provide a test for whether, say, a decent number of people would be willing to pay 10-20% extra for better service.
I've been gold SLF on US Airways for quite a few years now, and the in-flight services have noticeably declined: the meals keep getting smaller and less edible. In the last six months, they've taken the Airbuses with their economy class power outlets and personal video off the Gatwick-Philadelphia route, replacing them with older Boeings with no such amenities. One flight a few months ago we were put on a Boeing small enough (one aisle, no galley space) that it didn't have enough fuel to hold at Philadelphia and we had to stop at Boston to fuel up, delaying us by a couple of hours. Other than complaining to the airline - which I did - or taking my business elsewhere there is no way for me to signal to them that I'd pay a bit more to have better service. Business class passengers don't either: sure they can pay 6-10x as much for the bigger seat and better food, but they still get stuck with the same delays the economy passengers do. How can the market be constructed to provide better feedback?
wg
P.S. I want to add that the staff on that cramped Boeing were excellent and extremely professional. They absolutely did their best, including in being comfortably polite in listening to the irate Israeli woman in the next seat who did not stop b*I&^ching the entire flight - about the food, the seats, the overhead movies, the Gatwick departure that caused her to miss the flight the previous day when she went to Heathrow...)