The airline industry is a competitive market in society today. It is a perfect example of an oligopoly market structure because it is highly concentrated. There are many large players within the industry but only a few that determine the market prices like JetBlue. According to “CNN Travel” (2013) “For the ninth consecutive year, JetBlue Airways ranked first for satisfaction among all North American airlines.” JetBlue is one of the leading organizations in the airline industry. The organization keeps the costs low which has a direct impact on the other organizations. To ensure the demand stays high the need to keep the prices low is important. If only JetBlue kept its prices low then the organization would not be able to handle the supply side. There are only so many planes.
Therefore they keep them low enough to have competition with the other airlines. One of the reasons the airline industry is an oligopoly is due to the demand of travel and the basic needs of a typical passenger. Business travel does seem to be more of where the competitive side comes in though. Regardless of where the airline is currently ranked it is one of the major players in the market. The market structure was chosen because there are many barriers to enter the market. In the event the airline industry chose to use the perfect competition structure anyone could enter and exit as they pleased because there are no barriers in this structure. If the industry was in a monopoly structure there would be a lot less travel.
The demand may also be low because the firm would have total control over the prices therefore more than likely have them too high. If a monopolistic competition was chosen there would be minimal barriers and many firms therefore allowing many people to get in and create chaos. Having minimal competition the prices are manageable. Unfortunately, there are times when the prices rise due to supply and demand of things such as fuel. When the gas prices rise, so do the prices of the flights. Or, when it is around the time of the year when the organizations know consumers will be traveling and he or she will be willing to pay the higher prices.
The demand seems to rise during these times but the supply does not change therefore allowing the prices to increase and increase until consumers are no longer willing to pay for it. JetBlue is only one organization out of many that have a direct impact on the prices of airlines travel. The organization is number one because it has made changes to not only the prices but the overall experience to better accommodate the travelers. When an organization has competition like American Airlines or United Airlines it must find ways for it to stand out above the rest. Many consumers think having a cheaper flight makes it the best flight but that is not always the case. Regardless, the oligopoly in the airline industry is fierce and here to stay for a while.
Example firmGoods or services produced by the organizationBarriers to entryNumbers of firmsFirm’s control over pricePrice elasticity of demandPresence of economic profits in short-runPresence of economic profits in long-run Perfect CompetitionNatural Gas MarketerNatural GasThere are no barriers to enter the marketManyThe price is determined by supply and demand. The firm only has control on mark upsMarket supply and demand determine the price therefore the price is elastic because the supply and demand is affected by the change in price.
Firms can produce even if the price only covers the variable costs. The fixed costs have already been covered. Profits at this point can be plus, minus or even nothing.There is a very high probability that the natural gas marketer would earn low economic profits in the long-run because of the lack of entry barriers to enter the market. OligopolyVerizon Cellular ServiceCell service There are many barriers to enter the market. High start up costs, government regulations, and copyrights or patents. There are a small amount of large firms that make up the market. There is no absolute number. The firms have control over the price but often take to advertising or brand-name promotion.
Many times these firms will compete with others by giving away free phones or minimizing the price of plans. Oligopoly are price makers therefore they price elasticity of demand is elastic and effected by the price.The economic profits will be lower in the short-run in order to discourage new entries into the market.There is presence of economic profit in the long-run. There are fluctuations of the prices at times however the barriers make it more difficult to enter and exit the market. Monopolistic CompetitionMarlboroCigarettesThese firms have some restriction such as financial barriers that exist for new small businesses therefore economic profits may continue for any existing firmsThere are large numbers of firms.Product differentiation allows producers to have some control over the prices of their products.The demand curve is highly but not perfectly elastic as the seller has a lot of competition producing similar substitutes.
Under monopolistic competition, firms can earn positive or negative economic profit in short-runNon-price competition is why monopolistic competitors earn zero economic profit in long-run MonopolyElectric CompanyPowerGovernment tariffs, pricing limits, high start-up costs. There is only one firm.The firm has total control over the price. It can set it as high as it wants but it may decrease the demand. An electric company produces at the elastic portion of the demand curve. If producing at the inelastic portion of the demand curve, the monopoly could lower the quantity produced and increase the price to attain more total revenue.In the short-run the firm can be earning a positive, negative, or zero economic profit In the long run this firm will either make a normal profit or an economic profit.
CNN Travel. (2013). Retrieved from http://www.cnn.com/2013/05/15/travel/airline-satisfaction-survey