U.S. Airline Industry

Posted: August 25th, 2021

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Group Assignment One: U.S. Airline Industry

Price war in the airline industry has been a spontaneous event originating from competition among different firms. Airline firms can opt to get into the price wars in order to match their competition level in the market(Klemperer 406). Some of them could achieve this by pricing above their competitors whereas others could price below the competing organizations (Heil and Hensen 88).Essentially, price wars influence a company’s position in the market by allowing customers to choose from the alternative options.

a.    Is Industry Demand Increasing or Stagnant?

Stagnant demand in the airline industry can result in price wars between the dominant companies and the junior ones. In most cases, stagnating demand is common when the airlines experience idle capacity and produce no return(Heil and Hensen 89). Thus, a company intending to boost the level of demand will opt for price reduction as a way of enticing more customers for short-term profit maximization.

b.    Do Firms in the Industry Have Identical or Different Costs?

Cost variation is another stimulant of price wars in the airline industry. Some companies, especially those with stronger financial base, can choose to work collaboratively as cartels thereby increasing their prices and, ultimately, realizing higher profit margin. The presence of cartel’s profit can facilitate entry of other firms or can result in their exit.

c.    Are Firms Operating at Full or Excess Capacity?

In the airline market, firms operating in full capacity can induce stronger competition which can as well result in price wars. Such organizations enjoy some advantages over othersbecause of stronger product differentiation and greater market presence.However, the companies should be careful not to have overcapacity when demand is weak since they will have to decrease prices in the long run (Heil and Helsen 89).Such decisions will affect the companies with low capacity utilization prompting them to begin price war in order to survive.

d.    Switching Costs and Product Identity

Switching cost facilitates price wars by altering the market equilibrium. Entry of new airline firms can result in low pricing as the companies tend to capture the market share (Klemperer 406). However, the incumbents will respond by cutting their prices so that they can keep their loyal customers (Klemperer 406). After the entry period, the new organizations will tend to raise their prices to consolidate their profit maximization (Klemperer 406). The same is applied to the established airline industries depending on the level of switching costs.

Works Cited

Heil, Oliver, and Kristiaan Helsen. “Toward an understanding of price wars: Their nature and how they erupt.” International Journal of Research in Marketing, vol. 18, 2001, pp. 83-98, https://pdfs.semanticscholar.org/cea1/0ca5ac5b46ff71715438fd9f73550acfd78f.pdf?_ga=2.40270370.1812609362.1553887369-1201034417.1552131850

Klemperer, Paul. “Price Wars Caused by Switching Costs.” The Review of Economic Studies, vol. 56, no.3, 1989,pp. 405-420,https://www.researchgate.net/publication/4995400_Price_Wars_Caused_by_Switching_Costs