Oligopolist Aviation Industry Case Study

Oligopolist Aviation Industry: The case of India

INTRODUCTION

This paper discusses how the formation of cartels, resulting from an oligopolistic structure, places the market at a less than socially optimal level in the economy. Hiked pricing, high opportunity costs of time, and scarcity of the number of flights due to inadequate supply suggest that the aviation sector suffers due to the formation of these cartels. I will be looking at the Indian Aviation sector in particular in the first part of the paper, and would discuss possible solutions by comparing the aviation sectors of different states in the second part of the paper.

BACKGROUND

The transportation sector is an integral part a country’s economic growth and development. When

If all the firms produce too much, then the price may drop below their average total costs causing them losses. If they can restrict quantity to that which corresponds to where marginal cost equals marginal revenue for the oligopoly as a whole, then they can maximize their profits. This is when a cartel comes into picture; “a cartel is a special case of oligopoly when competing firms in an industry collude to create explicit, formal agreements to fix prices and production quantities” (Shrivastava & Gupta). Theory states that any market which is not perfectly competitive is inefficient to the economy. The price charged by the firms in an oligopolistic cartel is above the marginal cost, which suggests that there is underproduction from a social perspective and also that scarce resources are not used optimally. There are high barriers to entry in this market, and with the formation of cartels, consumers face high prices relative to prices in a perfectly competitive

The paper Cost of ATF in India, talks about how the three of the biggest suppliers are “state owned oil companies that enjoy access to essential facilities within India’s airports and maintain refinery capacity”, which leads to market dominance of those few suppliers. High fuel prices as an effect of this concentration of dominance prevents air carrier service providers to invest in more aircrafts and newer servicing routes. This impacts the consumers since they now face fewer variety of options and higher prices for all options available to them.
Cost of ATF in India and the study conducted by Nathan Economic Consulting India both also discusses how this concentration of power on crucial issues like fuel pricing impacts the economic growth as well; India’s international airports suffer with regards to services like maintenance and rehauling. The papers further explain how “due to this high cost of ATF, Indian airports lose this type of business to regional hubs like Singapore and Bangkok, which in turn reduces the airports ability to grow and improve