The market identification and the type of its structure
The airline industry has an Oligopoly market structure. In this industry, there are few companies operating in it. The oligopoly structure is characterized by situations whereby each company affects and is affected by transformations in the market. This is because there are a few firms in the market. The entry barriers are high considering that it is costly to start a business in such markets. The companies operating in this market structure compete on terms, rather than prices.
They also gain abnormal profits considering that they are few in the market, and hence face little or no competition due to high entry barriers. These characteristics among others are experienced in the airline industry. The airline companies just like the other oligopolies make decisions strategically whether to compete with their competitors or collude with them, whether to increase their prices or keep them constant and whether to be the first ones to come up with new strategies, or whether to wait and observe what their competitors do (Carey & Spector, 2012).
How the firm’s market structure affects its performance
In scenarios where companies in the airline industry show some signs of bankruptcy, merger cases are common. Accumulating debts, recession, and low pricing by new entrants and established airline companies, among other factors are instrumental in the falling out of companies. To avoid getting out of the market, such companies merge with other established airline companies to gain sustainable competitive advantage. The recent proposed merger of American Airlines with US Airways is a good example showing how companies in the airline industry operate.
As mentioned above, oligopolies reduce market competition by amalgamation. Once the two companies merge, it is obvious that the number of companies competing in the market will decrease. This way, the competition will be reduced. This will further lead to higher costs to consumers than before the amalgamation. The airline companies such as the US Airways Group Inc. will grow larger after merging or acquiring American Airlines from AMR Corp, its parent corporation. Such growth affects the performance of companies through influencing the market conditions. Since any change of strategy by a company affects the others; it is most likely that the other companies will follow the same trend, by merging with others to gain a competitive advantage (Carey & Spector, 2012).
As aforementioned, oligopolies do not compete on prices, but on terms. Therefore, merging with the American Airlines does not necessarily mean that the US Airways Group will set lower prices than its competitors. The company will instead use product differentiation, advertisements, and loyalty schemes, as terms to compete with its competitors. If the company makes a decision of cutting prices, their competitors will take a similar approach (Carey & Spector, 2012).
The collusion or merging will reduce competition in the airline industry and therefore, lead to higher costs than before for consumers. The other firms will obviously follow the same trend, and hence there will be no competition in the industry. The consumers will suffer higher costs as the airline companies maximize on profits (Carey & Spector, 2012).
The implications for consumers of the type of market structure
The oligopoly market structure in the airline industry affects consumers because they are forced to receive services at higher costs. Apart from the few new entrants in the market industry which offers services at lower prices, the established airline companies charge relatively high prices. They also use other competitive strategies to make it difficult for new companies to succeed in the market. The consumers are left with no choice but to pay for the high costs in order to get satisfied (Carey & Spector, 2012).
Carey, S., & Spector, M. (2012). US Airways CEO, American Unions Talk Up Merger. (Cover story). Wall Street Journal – Eastern Edition. pp. A1-A2.