Oligopoly Behavior in the Airline Industry. Case Analysis

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Oligopoly Behavior in the Airline Industry. Case Analysis This case illustrates the pricing behavior of firms that are oligopoly whose market is characterized by the relative few participating firms offering differentiated or standardized products or services. Such firms in an oligopoly have market power derived from barriers of entry that wards off potential participants. As seen in the case, it is clear that because there are a small number of US Airlines firms competing with each other, their behavior is mutually interdependent – thus, the strategies and decisions by one airline management affect managements of the other airlines whose subsequent decisions then affect the first airline. In the airline industry, such oligopolistic…show more content…
When they didn’t, the airline retaliated by offering deep cuts in fares on several routes flown by its competitors. Northwest airline responded with a $198 round-trip fares with connections on routes for which American airline’s average fare was $1,600. American’s response was to offer $99 one way fairs in 10 markets flown by each of the other competitors except that of Continental Airlines which had followed and matched the leader’s (American Airline) original changes in all markets. With respect to the concept of strategic behavior exhibited by firms in an oligopolistic setting, some firms may try to achieve a dominant strategy that yields them better results and do not flip-flop, no matter what strategies other industry participant follow. This was illustrated in the case, when, in 2004, Continental Airlines raised its fares to mitigate rising cost of aviation fuel. Firms in an oligopoly may differ in terms of their cost structure and the airline industry is no exception and participants do exhibit strategies that enable them not to follow price increases driven by aviation fuel cost.

For example, when it comes to cost of inputs, such as fuel, the price taken may be different due to hedging (contract to mitigate their exposure to future fuel prices that may be higher than current prices )- a risk management technique to reduce the risk of adverse price
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