Price Dispersion, Competition, And The Role Of Online Travel Agents

Spirit Airlines, the leading ultra-low-cost, no-frills carrier; the worst all round Carrier charges for every service besides the basic fare. For this purpose, this paper will discuss the Carrier ticket distribution channels, pricing strategy and product promotion.

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.

The airline industry has long attempted to segment the air travel market in order to effectively target its constituents. The classic airline model consists of First Class, Business Class and Economy, and the demographics that make up the classes have both similarities and differences to the other classes. For instance there may be similarities between business class travellers on a particular flight, but they will not all be travelling for the same reason. An almost-universal characteristic of air travel is that customers do not fly for the sake of flying; the destination is the important element and the travel is a by-product, a means-to-an-end that involves the necessity of an aircraft that gets the customer from point A to point B.

* Travel agencies: Travel agencies have strong relationships with the cruise industry as they book around two thirds of their cruise. Although this percentage is declining due to the growth of consumer knowledge and technology the percentage of cruisers using travel agents is relatively strong. (UCLIA)

Market structure can be defined as patterns of behaviour by enterprises in an effort to adjust to the markets in which they operate (buy or sell). Pricing strategies and collusive behaviour mergers are a few dimensions of market conduct. It is the industry norm for a legacy carrier to offer service to most popular destinations; Delta reducing routes to a similar schedule as the low-cost airlines is not an option in the multi-billion dollar industry. In order to gain market share from low-cost airlines, Delta must create a value proposition that differentiates itself from its competitors. Many customers will pay a premium if the level of service provided is higher than the low-cost, no-frills

Even if the company can have a strong position against its buyers due to the business characteristics the close relationship that the customers have with the travel agencies gives their a greater influence over the ticket price.

Powerful customer-the flip side of powerful suppliers-can capture more value by forcing down prices, demanding better quality or more service, and generally playing industry participants off against one another at the expense of industry profitability. Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reduction. The bargaining power of the buyers is very high as now a day’s tickets can be booked online and if they can go for the cheapest fares and there is not much cost involved in it.

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

carrier; the worst all-around carrier charges for every ancillary product. Established under Airline Segmentation, Spirit targets price sensitive, business-class, middle-class, students and solo travelers within psychographics (Zigu, 2017). Consequently, this paper will discuss the carrier; ticket distribution channels, pricing strategy, and product promotion.

It is relatively price-inelastic for business travel. Due to the budget of their business, encouraging them to travel more frequently by offering low prices will not effect to their travel decision. In another way around, increasing prices neither discourage they to hesitate go travelling.

Airlines use a formula of combining their yield and inventory costs to determine ticket prices. While it is imperative to focus on the idea of being profitable, the focus is to maximize the cost of the flight revenue. One huge factor that encourages an increase in the cost of tickets relates to a customer ordering a ticket close to the departing date, define this as a risk factor because they need to make up for all unsold seats. A high percentage of the revenue is dedicated to overhead costs such as fuel and labor. When a ticket price is higher with one airline than the other, the customer interprets this as being an excessive cost. The demand is greatly affected by the external market

The buyers of the services of travel agencies are consumers, that is, individuals and businesses. For this industry we are dealing with a small degree of concentration, due to the wide range of services.

Buyer power is high because there are many alternative airlines and the service the airlines provides are typically undifferentiated, therefore customers typically purchase airline tickets based on price not on carrier. The airline industry has numerous of airlines to choose from and generally it does not matter if customers are going on a business trip or simple pleasure, customers tend to constantly go with the lowest price. The development of the Internet has had an intense impact on the way consumers search, plan and book their trips. The fact that booking most of the cheap airlines can be conducted via the internet, has led to a growth in the popularity of this medium, because it allows users to easily compare prices published by airlines. For instance, customers can use various websites such as Expedia.com, Travelocity.com, Kayak.com, among others, to compare flight prices leading to a tremendous competition against airlines companies.

first it should be underlined, that in the airline industry, there are two types of buyers (Hartley, 2013). The first type is the individual buyers, who buy tickets for personal or business reasons, related to their own individual well beings. This type of buyers is extremely diverse and there is barely someone who had never bought a ticket, especially in the developed countries. A plane ticked could be purchased directly from the airline company’s ticket offices or from the second group of buyers, e.g. travel agencies and online portals. This buyer group works as a middle man between airlines and flyers. They work with many airline companies to give consumers the best possible flight. Between these two groups there is definitely a large amount of buyers compared to the number of firms. There is low cost shifting between companies because many people choose flights based on where they are going and costs at the time. This is a loyalty to the companies, but not enough high switching costs. Each client needs a lot of important information. They need

Internet ticketing has encouraged many passengers to book through internet websites, as these sites tend to be less expensive by means of payment considering the traditional way where individuals would have to visit the airline offices. Airlines have been able to trim the commission costs that they were paying to travel agencies by using the internet. Consumers who booked via the internet websites have benefited by being able to compare and access scheduling information, as well as finding special low fares that are available (Paul, 2005). As far as the author is concerned, the strategy of controlling the distribution of airline tickets varies from one airline to the other because of different cultures; for instance, for a data vendor that is not global distribution system processes a booking made through Continental website and, on the other hand, Delta airline normally controls its ticket distribution through its computer