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Most airline routes in the US, Europe, and increasingly worldwide, are intensely competitive, yet most are...

Most airline routes in the US, Europe, and increasingly worldwide, are intensely competitive, yet most are oligopolies. What model of oligopoly is consistent with the price competition typical of the airline industry?

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Answer #1

This is Sweezy kinked demand curve model of Oligopoly. In that model, there are a handful of large firms serving the market whose main motive is not profit earning but surviving in the market. The competition in such market is intense and all the firms are dependent on the other firm for decision making.

The demand curve gets kinked at the price, which means if the firm increases the price it will lose significant market share making the demand curve elastic above the price and if the firm decreases the market price the other competitors will also decrease their prices making the curve inelastic below the price.

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