Question

The airline industry has been in the news over the last few months. News reports have highlighted their customer service and the prices they are charging for tickets. In your opinion, what type of market structure is the airline industry? Why does  the structure lead to the problems that have been highlighted by the news? Should the government step in with regulations?

Your answer should be a minimum of 5 sentences and should be supported by what you have learned in unit 2 and 3.

Answer 1

Airline industry is in the nature of oligopoly because there are very few firms operating, there is a huge start up cost and each firm's own decision to supply and charge a price depends on what its rivals are doing. This strategic dependence makes each firm think of its own strategy as being influenced by the economic decisions of its rivals.

In such an industry, there is a market power belonging to each firm so that it charges a higher price and produce a lower quantity. Another problem can sometimes be related to quality where lack of competition and government agency's weak monitoring lead to poor consumer service. In most of these markets there is a regulatory authority and hence, there is a need for the government to intervene. This is because without such regulation, strategic dependence might result in excessively high prices.