Question

In 1992 American Airlines offered a 50-percent-off sale and cut fares. In 1993 Continental Airlines and Northwest Airlines sued American Airlines over this action.

1. What was the likely basis of the suit?
2. How does the knowledge that Continental and Northwest were in serious financial trouble play a role in the suit?

Answer 1

I) The basis of this suit is the contestable market of oligopoly. This type of model occurs when a there are low barriers to entry or exit in the industry and one of the firms try and gain the maximum share.

The American airlines offering discounts is one such model. Here the offer led to a decline in other competitors' profit share since there is less consumer loyalty, more sunk cost. They incur more and more losses due to this.

ii) This is seen by the fact that the other two companies could have indulged in the price contest ie reduced their prices by offering heavy discounts, had they not been in financial crisis. Suing the one that is offering discounts simply means that the companies are not able to compete and hence in order to drive American airlines out or simply to increase their share and sales, they indulge in suing the airlines.