Essay on Collusion Between British Airways and Virgin

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The tacit collusion case to be discussed involves the illegal collusion and setting of fuel surcharges to commercial and cargo transatlantic fares between British Airways (BA) and Virgin Atlantic Airways (Virgin). The factors which contributed to its success will be discussed, as well as why, and its implications, of becoming public. To begin with, it would be beneficial to define both collusive behaviour and the nature of the competition involved in the aviation industry.
Collusion is the act of a number of firms within an industry agreeing to set a certain price, output or another parameter and is almost always against the law. This is as they all compete in the given industry, with the setting of prices or outputs done in favour of the
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As the nature of the good is a seat on a plane, clearly capacity constraints are present in the form of the limited seating on aircraft, as well as the inability to in the short run increase output beyond full capacity. During the setting of price, clear communication will most likely result in a non-static equilibrium. As well as this, the symmetry in terms of the market and cost structures has played a part in creating a successful cartel. Each firm produces a relatively homogenous good in terms of economy, business or first class, with a limited amount of features it can differentiate itself from its competitors. As well as this, using Figure 1, which will be discussed later on, demonstrates that the main costs to an airline are those which cannot be easily reduced or offset, most notably the cost of fuel and aircraft maintenance. Therefore both firms have near perfect knowledge of the cost structure and revenue through observing prices, and will aid in choosing a certain pricing strategy.

What follows will be a detailed discussion of the specific market conditions which lead to the successful collusion between BA and Virgin.
The UK Transatlantic Flight market as a whole can be said to hold many key factors which have led to successful collusion. The first is due to the high levels of
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