Airline Industry Case Study

Discussion Question 8:

There are two types of cartels, a market-sharing cartel and a centralized cartel (Salvator, 2015). A market-sharing cartel is one where each member is given exclusive rights to operate in a particular geographic area. A centralized cartel is one where there is a formal agreement as to price, output, and profit sharing. OPEC initially attempted to set centralized cartel with a mission to “coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry” (Organization of Petroleum Exporting

The airline industry requires massive amounts of capital to run flights and most consumers will only purchase tickets from companies which they recognize, this shows the difficulties that new entrants will have in trying to penetrate the market. Consumers have a great deal of buying power in the airline industry because there are a sufficient number of competitors and most consumers will focus on time and price when purchasing flights. These two things combined with the lack of loyalty to one airline shows that buyers have a sufficient amount of power in the industry. The suppliers of the airline industry have a great deal of power as there are only two major airplane manufacturers, Boeing and Airbus, with most firms entering long term contracts for the planes they require. As of currently there is a low threat of substitutes, as the only currently available substitutes (cars, boats, and trains) in America today take exponentially longer to reach their destination than do planes. Lastly, there is a high level of rivalry among firms (or the alliances they are part of) because every airline is fighting to provide the most valuable product to the consumer at the cheapest price. Since most tickets are purchased on a criteria of minimizing cost there is very little product differentiation or extreme market specialization in the