Airline Oligopoly!
In class, we started to learn about oligopolies and the different tactics within this type of market. An oligopoly is a form of market where it is dominated by several large companies. Oligopolies are similar to monopolistic competition, but instead have products that are similar to one another. Oligopolies are seen throughout our daily lives, with things like cell phone carriers, auto manufactures, etc. The airline industry is also an example of an oligopoly. As of 2017, “there are four major domestic airlines – American Airlines, Inc. (AAL), Delta Air Lines, Inc. (DAL) Southwest and United Airlines.” While there are many smaller airlines, these 4 have dominated the market. With this competitive industry, the airlines must find ways to differentiate themselves from their competition. This is mostly seen in the form of advertising and additional benefits.
Many airlines utilize advertising to attract customers. Delta has Sky360 Lounges, sleek and fancy set ups , packed with food and drinks. If you are a “Member of Delta's SkyMiles frequent flier program with Diamond Medallion status”, then you get to enjoy these luxuries. This helps to attract new customers in to use their airline for their next trip. With the experience itself,some airlines have additions like larger menu selection and person TV’s. The quality makes these people have nicer experience, and like the Sky360 Lounges, will most likely get people to use them again. Between the airlines, there isn’t much difference between the goal and execution of their service. All these airlines fly you to your destination, whether it be vacation, a business trips, etc. This means they have to find other ways to separate themselves and stand out as the best option. Southwest, for example, pushes for their message of “transfarency”. According to the Southwest website, transfarency is “philosophy in which Customers are treated honestly and fairly, and low fares actually stay low—no unexpected bag fees, change fees, or hidden fees.” This intriguing idea is one of the ways that Southwest distinguishes themselves from their competitors.
Oligopolies make it hard for other companies to go into the market. Parallel exclusion occurs, the moment in which these companies block or limit the ability for other (usually smaller) companies from entering the industry. Alaska Airlines, Jetblue and Spirit are all examples of smaller airlines that are having to compete with the giant ones.
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This is super interesting! I remember an incident that happened on a United Airlines flight where a doctor was beaten and dragged out of the aircraft because the plane was overbooked. Despite the controversy, United is still a dominating power in the airline industry (and almost went without proper consequences! besides the settlement). This goes to show how much power an oligopoly has on society and how invincible they are even when they are revealed to be very corrupt and distasteful companies. It is quite outrageous how untouchable these oligopolies are but I guess that is the nature of the industries that are dominated by them. It is possible that the government can get involved but it would require a lot of bills and willing correspondents. But it seems unlikely that things will be changed for oligopolies (as seen by FCC trying to regulate web giants--- nothing)
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https://splinternews.com/airlines-can-treat-you-like-garbage-because-they-are-an-1794192270
https://www.independent.co.uk/news/business/news/united-airlines-settlement-david-dao-passenger-dragged-off-flight-video-a7706591.html
Interesting post! I just read about Wow Air closing down, leaving more than a thousand passengers stranded internationally. After just 8 years of existence, Wow Air went out of business. Wow was a budget airline based in Iceland. Luckily, other airlines adhered to crisis prices -- they offered reduced airfare for stranded travelers. For these airlines, the stranded passengers represent new customers; since they can no longer book tickets on Wow, maybe their experience with a new airline will convince them to book with it next time. Wow couldn't complete with the larger airlines, and the consumers have to suffer the consequences along with its employees. Passengers are not guaranteed a refund. Do you think there should be stronger protections for passengers/consumers on airlines? Should they be guaranteed a flight if something happens to their airline?
ReplyDeleteSource: https://www.cnn.com/2019/03/28/business/wow-air-scli-intl/index.html
Very interesting post! The idea that oligopolies have to find a way to separate themselves from one another is super important as they each have pretty standardized products and hold large shares in the industry. It is this advertising of the companies that allows shares to shift and one company to do better than another. According to one source, "[advertising] helps them increase their overall market share and can also influence the demand of their product and cause it to rise." Even though there are a small number of competitors, these companies still need to compete against each other through advertising to separate themselves to try to establish themselves as an even bigger company.
ReplyDeleteSource: https://www.ukessays.com/essays/economics/the-advertisement-impact-oligopoly-economics-essay.php
The airline industry is perfect for observing an oligopolistic market, as many similar airlines compete with nearly identical services, only differing in mainly prices and start/endpoint locations. The message by Southwest shows how airlines try to differentiate themselves from others, and their particular message can remind customers of the recent event that took place on a United aircraft. Intuitively, it makes sense for the airline industry to be an oligopoly; it's very hard for one airline to dominate the market, as it's hard to cover so much ground and other airlines can offer lower prices or other incentives. However, they could potentially work together by agreeing to not interfere with each other ie. one airline could cover a flight to a location while another could cover a flight out of the location. A graph online shows revenue passenger miles, with the top 4 airlines leading with 127, 126, 118, and 105, while 5th place has only 39.
ReplyDeletehttps://research.stlouisfed.org/publications/page1-econ/2018/11/01/the-economics-of-flying-how-competitive-are-the-friendly-skies/
Very informative post. Oligopolies definitely have different ways to compete with other firms in the market. By taking at look at the airline market, they all have a big presence in the advertising fields. If you take a look, all airline have a big social media presence, due to the fact that must rely on advertising in order to compete in the industry and social media is a great way to reach out to those people. With the airline market being an oligopoly, prices set by smaller firms can make an impact on the leading firms. Spirit, launched cheaper one way flight tickets causing the average fare to drop and catching the attention of bigger firms such as American and United airlines attention. What those bigger firms do to compete with firms with cheaper prices is that they offer "basic economy" tickets at a price competitively cheap but do not offer amenities that most consumers would expect.
ReplyDeletehttps://www.nytimes.com/2017/09/01/business/budget-airlines-ticket-prices.html