The airline industry is a very competitive market, in the past 2 decades the industry has expanded and still expanding its routes domestic and globally in the beginning airline industry was partly government-owned but in recent years many privatizations with the airline industry have taken place. However, the United States airline industry today is arguably an oligopoly. An oligopoly exists when a market is controlled by a small group of firms, often because the barrier to entry is significant enough to discourage potential competitors. As of 2017, there are four major domestic airlines – American Airlines, Inc. (AAL), Delta Air Lines, Inc. (DAL) Southwest and United Airlines, subsidiary of United Continental Holdings, Inc. (UAL) – which fly about 80% of all domestic passengers.
According to Investopedia, which states, “In 2015, North American airlines were projected by the International Air Transport Association (IATA) to earn $15.7 billion in net profits and achieve net profit margins of 7.5%, which is twice the worldwide average. Delta has the largest market share with 16.7%. Southwest is close behind with 16.6%, while United and American have 15.3% and 12.5% respectively. The U.S. hasn’t had a new scheduled passenger airline since 2007.” Therefore, there are only a few U.S. airlines can compete successfully. The reasons which drive the airline to be successful are their products are differentiated.
The products provided by the different airlines include prices, customer service, if provide meals on the plan, whether allows carry on, direct flight or indirect fly and so on. Different people carry different standards to pick a flight. For instance, some people would like to carry lots of stuff while they travel, they would choose the airline which provides free carry on then the one doesn’t; some people will carry about if there are stops and layovers, so they would spend more money on the flights without layovers. All these provided by airlines will make their products differentiate.
Since the airline industry is an oligopoly, it’s hard for other companies to enter the industry. There are 4 reasons explained by bizfluent.com. Firstly, “Purchasing a fleet of airplanes is a significant barrier to entry for many newcomers in the airline industry.” The fuel is the largest barrier to entry for many industry newcomers; Thirdly, airlines are subject to a significant range of government regulations and comply with all of them can be a barrier to entry for some airline entrepreneurs.
Fourthly, according to the New York Times, a small number of major airlines control most of the fates at large hub airports, making it difficult for new airlines to get a foothold in these markets. Therefore, most of the big airline companies already take the market share and the resources, which will not give industry newcomers barriers to entry to the market.
American Airlines, Delta Airlines, Southwest Airlines, and United Airlines has more than 70% of the market share. There are a few other competitors in the market, however, they only have less than 10% market share. Market power is the ability of a firm to profitably raise the market price of a good or service over marginal cost. In an oligopoly market structure, companies may engage in collusion, either tacit or overt, and thereby exercise market power.
A group of firms that explicitly agree to affect the market price or output. In the airline industry, we often will see that all the companies will increase the flight tickets during certain period time, for example, around school spring break, summer vacation and winter break. Even though the tickets are more expensive than other months, airline companies still have high demands, since people will travel around during vacation. This indicated that the airline industry has market power because they have the ability to adjust or control the market price, even though they raise the price of the tickets, they can keep their customers.
Firms operating under conditions of oligopoly are said to be interdependent, which means they cannot act independently of each other. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. Interdependent can be shown in two ways, one is a game theory that looks at the players in a game or firm in a market in making the decision each player has several choices.
Each player is influenced by their own actions and the actions of other players; another is kinked demand curve, which is if they raise price above P* the demand curve is relatively elastic as people will switch to buying substitute products from competitors; if they drop price below P* they face an inelastic demand curve as other firms will also cut prices so few gains in quantity demanded to occur. In the airline industry, we can see that if one airline increases the ticket price during Christmas time or summer vacation time, all other airlines also have similar prices. If an airline lowers its price, all other airlines also will lower their prices, since they don’t want to lose their customers.
All the actions implied that firms in an oligopoly face a kinked demand curve and game theory. As we mentioned before, American, US Airways, United and Delta have more than 70% of market share, the HHI is 1385.53, but if American and US Airways merge, the HHI will change to 1628.53. The change will be 243, a merger that results in post-merger HHI of increase in the HHI is greater than 100 we should prevent the merger.
The proliferation of low-cost flights in recent years has pushed the airline industry, which was arguably an oligopoly, toward monopolistic competition. Like the airline industry, most other industries do not fall neatly into one of the four standard market structure classifications. In fact, market structures could be thought of as a continuum from pure monopoly to perfect competition. (See the boxed insert.) Although the lines between market structures are not always clear, market structures can help explain how firms might behave based on the number of buyers and sellers. They can also help explain how the prices of goods and services are determined.
The airline industry has undergone a number of major shifts, starting with the deregulation of the industry in 1978. The most recent shift, the expansion of low-cost flights, suggests that consumers prefer lower prices over higher-quality service. And it is possible that another structural shift could cause the airline industry to look very different from the way it looks today.
Cite this Essay
To export a reference to this article please select a referencing style below