Airline Industry and Contestability Project What is a contestable market?
In a contestable market, there are one or a number of firms which
profit maximise. In other words the number of firms is irrelevant. The
key assumption to make here is that barriers to entry to the industry
are relatively low, as is the cost to exit the industry. The existence
of potential entrants into the industry will tend to keep profits to
their normal level even in the short run, because existing firms will
want to deter new entrants from coming into the market. Contestable
markets are both productively and allocatively efficient and are
likely to be efficient in the short run as well.
The theory regarding the type of profit made in a contestable market
is this. Abnormal profit can only be made in the short run, only
normal profit will be made in the long run. The reason being is that
when firm try to profit maximises in the short run then this will
attract new entrants into the market to take some of this profit away
from the existing firm. As more competition is attracted then the new
prices will force the prices and the profit down. This is the reason
why it is only possible to make normal profit in the long run. The
threat of potential entrants into the industry means that existing
firms will behave competitively, even if the firm is a monopoly.
The key assumption of a contestable market is that it gives the firms
the ability to enter and exit the market. It is natural to assume that
a monopoly is going to have high barriers to entry, but theory
suggests that there is a large dependence on the cost to exit the
industry rather than enter it. The cost of exiting and Industry is
often termed as sunk costs. These are the costs that a firm can't
recover when they decide to exit the industry. An example of a sunk
cost would be money spent on advertising, because you cannot recover
the money you spent on advertising. If sunk costs are low or virtually
nothing then it is correct to assume that a firm is operating in a
contestable market. The lower the sunk cost the greater the
contestability of the market.
The ease at which a firm can enter and exit a market will leave it
vulnerable to 'Hit and Run' competition. If there is abnormal profit
in an industry then newcomers will enter the market, take their share
of the excess profit and exit the...
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...ity of service. In a less contestable
market firms are under less pressure to produce a service of the
highest quality. Recent mergers involving Easyjet and Ryanair have
meant that the industry is being dominated by two big firms. This is
an example of a Contestable market, because there is less competition
and these larger firms will benefit from economies of scale such as
brand loyalty and these firms will have more slots for taking off or
landing, which reduces the amount of competitors that can enter.
The reason why it may be contestable is that in the industry there are
lots of profits to be made. An increase in Ryanair profits would
attract "hit and run" competition. Another reason is that Ryanair was
able to purchase a Boeing 747 at a significant discount. This means
that there will be low sunk costs as these planes could be sold off if
you decide to exit the industry.
To conclude it can be said that the low cost airline industry is seen
as contestable, because of the east to set up, excess profits, but
recent news show that it is more becoming less and less contestable
with mergers and few firms producing at low cost and really dominating
the industry.
The pros of an airline implementing a policy that bigger customers need to buy a second seat is that the weight capacity regulations will be followed to. As well as the cons of an airline implementing a policy that larger customers need to buy a second seat would result in a bigger people who travelling will not uses that airlines anymore, airlines would be glowered on by family or relatives of larger customers, airline’s policies could be vigorously monitored for discriminatory actions against overweight persons. As mentioned in the book there are no federal laws prohibiting discrimination against obese individual, although there are some places such as Wisconsin, DC, and California provide legal protection. (Harvey & Allard , 2012, p. 234)
Shmoop Editorial Team. "The Market Revolution Summary & Analysis." Shmoop University, Inc. Shmoop.com, 11 Nov. 2008. Web. 4 Nov. 2011. .
The Airline Industry is a fascinating market. It has been one of the few industries to reach astounding milestones. For example, over 200 airlines have gone out of business since deregulation occurred in 1978. Currently, more than 50% of the airlines in the industry are operating under Chapter 11 regulations. Since 9/11, four of the six large carriers have filed for and are currently under bankruptcy court protection. Since 9/11 the industry has lost over $30 billion dollars, and this loss continues to increase. Despite the fact that the airline industry is in a state of despair, JetBlue has become the golden example, a glimpse of what the industry could be.
In today's competitive marketplace, all firms are seeking ways to improve their overall performance. One such method of improvement, recently adopted by many firms, is benchmarking. Benchmarking is a technique used to evaluate internal business processes. "In this analysis, managers determine the firm's critical processes and outputs, baseline those processes, then compare the performance of each process against a standard outside the industry" (Bounds, Yorks, Adams, & Ranney 1994). To effectively improve a business process to world-class quality, managers must find a firm that is recognized as a global leader, not just the industry standard. Successful benchmarking requires tailor-made solutions, not just blind copying of another organization. Measurement and interpretation of data collected is the key to creating business process solutions.
The oligopoly market is a few relatively large firms that have adequate to significant market power and that they recognize their interdependence. Each firm know that their choice of actions or changes in their outputs will have an effect on other firms and in response to the change, other firms will take actions accordingly to adjust therefore will affect its sales and revenue. (Thomas 428) To closely define, the oligopoly characteristics consist of (a) a few large dominant firms; (b) a product or services either standardized or differentiated; (c) firm’s decision on price and output affect the demand and marginal revenue of other firms in the market and vice versa; and (d) the entry barriers to become a dominant firm consist of substantial involvement of technology and economical terms. With these characteristics, there are usually as few as two and as many as ten firms that make up large market shares in any one particular industry.
Before we discuss government intervention and its affect on an industry’s competition we must first seek to understand the five forces framework. The theory, discussed in 1979 by Micheal Porter seeks to evaluate the attractiveness of an industry. Throughout this essay I will explore the theory and then relate government action and its well-documented affects on the airline industry.
Topic A (oligopoly) - "The ' An oligopoly is defined as "a market structure in which only a few sellers offer similar or identical products" (Gans, King and Mankiw 1999, pp.-334). Since there are only a few sellers, the actions of any one firm in an oligopolistic market can have a large impact on the profits of all the other firms. Due to this, all the firms in an oligopolistic market are interdependent on one another. This relationship between the few sellers is what differentiates oligopolies from perfect competition and monopolies.
Several large companies have focused on the multi-occupant vehicle market, specifically school bus production, in North America. Competitors within the school bus manufacturing industry consist of the Henlys Group PLC, a British based company, and two U.S. bus companies, Collins Industries Inc. and Navistar International. Henlys consists of Blue Bird Corporation, Prevost Car Inc., Nova Bus and TransBus International Ltd. Collins Industries operates seven vehicle companies including Collins Bus Corporation and Mid Bus Corporation that make up their school bus line. And finally, Navistar International, which also produces school buses, is divided into three principal industry segments. These segments are trucks/buses, engines, and financial services.
Potential of new entry into the industry: A company 's power is also affected by the force of new entrants company into the market. Well established
Shortly after World War I, the U.S. Government discovered the abilities of the modern airplane and created the idea of utilizing aircraft to transport mail across the country. In 1917, Congress approved funding to experiment with the idea of delivering mail by air. By 1920, the Post Office was delivering mail across the entire country, eliminating over 22 hours in delivery times of a coast-to-coast route. With the success of the airmail service and the growing popularity of civil aviation, the U.S. Government recognized the need to develop set standards for civil aviation and in 1926 created the Air Commerce Act of 1926. The Air Commerce Act of 1926 called for the government to regulate air routes, navigation systems, pilot and aircraft licensing and investigation of accidents. The act also controlled how airlines were compensated for mail delivery. Later in 1930, Postmaster General Walter Brown made recommendations which were later known as the Watres Act which consolidated airmail routes and opened the door for longer-term contracts with the airlines. Brown handled the situation regarding new contracts poorly by only inviting a hand selected list of large airlines to the negotiation table. This move pushed smaller airlines to complain and the issue was pushed to Congress. Following congressional hearings President Roosevelt later decided Brown’s scandal was too much to deal with and canceled all mail contracts completely and handed over air mail delivery responsibility to the U.S. Army. That decision was a disaster, and one month later, air mail was handed back over to the private sector. This time, however contract bidding was more structured and fair to all. It was then clear that the airline industry was back in full swing...
In the short run, oligopolies are. able to earn abnormal profits, but in the long run as well they are. able to sustain abnormal profits due to the barriers to entry and exit. Then the s The barriers act as a strong deterrent to firms that want to come in. the industry and " eat into" the abnormal profits and then exit the market.
Threat of new entrants – threat of new entry depends upon entry and exit barriers.
Product Strategy of the British Airways 1.1 Introduction to product strategy Product is the most important component in an organization. Without a product there is no place, no price, no promotion, and no business. Product is anything that can be offered to a market to satisfy a want or a need. It is the core ingredient of the marketing mix and is everything favorable and unfavorable, tangible and intangible received in the exchange of an idea, service or good (Kotler 11th edition, 2003). British Airways is a business offering service products, flights across destinations, in the transportation industry.
Market segmentation means dividing the market into distinct groups that have common needs and will respond similarly to marketing action. Each segment must be unique, have common needs, and respond in a similar manner to marketing efforts. Target market is the group of potential customer that has been selected by business to focus its marketing efforts towards. This is the group the business wants to sell its products/services to. Positioning refers to the image created in the minds of customer of its product or brand. It is a perception created in the minds of the consumer relative to that of its competitors.
As Boeing’s CEO, Frank Shrontz promised to increase earnings and return on equity. Boeing had a history of making money when its competitors did not, but Mr. Shrontz wanted higher returns. The airline industry was characterized by large cash outflows for R&D and manufacturing and long payback periods over long life cycles for each new airframe design. Companies had to have deep pockets to keep the operation going while waiting for a return on their investments. If Mr. Shrontz could increase the return on equity for Boeing, it would increase the likelihood of Boeing’s continued success well into the future.