Last Updated 30 Mar 2021

Market Models

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The main objective of a private firm is to maximize profits and without the control over costs, they try to sell at higher prices. This is true if the operating industry has an inelastic demand schedule as a price rise brings in higher revenue. The Marginal revenue concept states that in order to increase revenues, firms need to lower prices if they are operating in a price-elastic industry but a fall in price in a relatively in-elastic demand adds a deficit to the revenue that so firms increase their prices in order to attain a higher profit.

The US airline industry operates in the oligopolistic structure. That is the big four firms namely American, Southwest, United and Delta have a combined share of more than 40% of the market which supports the fact that these firms can be classified as oligopolies. Further the firms do not react to price increases that sharply as it is a characteristic of an oligopoly to react more towards a price fall rather than an increase except for the case of a market leader.

No, the result will not differ whether we consider the entire domestic market or just the market for San Francisco and Seattle. The firms operating are same and customers are quite rational that is the service being offered is homogenous so it would not matter if we look at it as a whole or individually. Here a price rise in the case of a single market would mean that the competitor may gain an advantage and attain higher revenue.

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There are many advantages of collusion or price fixing related to competitors. One of them being an equal share for all, this means that they can share areas among themselves and reduce competition. This helps reduce uncertainty as the market saturation is done and firms are bound by agreement to receive equal share. This would further give rise to profits and most of all this behavior is a very strong entry barrier as firms can unite in order to drive away an entrant. Collusive pricing also means a restricted supply therefore firms can ask higher prices as there is a quota in place thus creating an in-elastic demand.

No, an oligopoly operates in between both extremes of its demand schedule that is the elastic region and the in-elastic region. The reason that the firm rescinds from increasing prices is due to the fear of losing its market share as the products in this industry are homogenous and so the customers would shift easily to other airlines. The oligopolists must consider how their rivals will react to any change in the price, output, characteristics, or advertising. Oligopoly is thus characterized by strategic behaviour and mutual interdependence. By strategic behaviour we simply mean self interested behaviour that takes into account the reaction of others. So we can not associate that such advertisements or statements are for a fixture in price.

Bibliography

Parkin, Michael. (2004) Economics. Addison Wesley Publishing Company

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