Late in the day on August 7, 2006, numerous U.
S. airlines cut their fares on leisure travelers. These included American Airlines, Delta, Continental, and Southwest. This fare cut, which was approximately 4 to 8 percent, occurred during a period of rising fuel costs and a record number of seats being filled. If costs are up and demand is strong, why did these airlines reduce their prices on this class of passengers? The explanation is that they were following the lead of United. United Airlines is the implicit price leader in this industry and many other carriers watch closely what the leader does and base their decisions on the leader’s actions. Such behavior is not uncommon in an industry dominated by a few large firms.What market structure does the airline industry most likely resemble and why?The United Airline industry is an example of the oligopoly.
As we know 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 from entering it. We have few powerful firms like American Airline (AA), Delta, Continental, and Southwest.United classifies to Jetblue, Spirit.The behavior of oligopolistic firms can be determined through assumptions of price and quantity based on two important models which are the kinked demand curve and game theory. The kinked demand curve is a model that shows assumptions from managers in relation to the way they think rivals will act and how competitors will not follow. Furthermore, United implicit price leader and it is also kinked demand curve.United reduced prices impact to competitors retaliate.
United increase prices do not impact competitors (do not retaliate).For example United lower prices to increase market share. Otherwise American Airlines, Delta, and Southwest, they also want to preserve their market share.Oligopoly is not behaving directly as a monopoly.Price fixing-Monopoly price, restrict output.
In brief, the explanation is that they were following the lead of UNITED. United Airlines is the implicit price leader in this industry and many other carriers watch closely what the leader does and base their decisions on the leader’s actions. Such behavior is not uncommon in an industry dominated by a few large firms.