Contestable 39′ Shreenaeconomics Is the airline market contestable? Definition Of contestability – when there are none or low barriers to entry for incumbent firms Where they Will be forced to keep prices competitive and profits low in the long term. Otherwise this Will encourage Other firms to enter into the market.
There are roughly 20 airline companies based in the 0K market It iS a form Of an oligopolistic market and price is not always the determinant of demand but non price factors such as Inflight services and atmosphere. Is contestable Not contestable Low cost airlines as there are lower barriers to entry and exit as you can lease airplanes and reduce the set up costs. There are also no sunk costs If leased airplanes.
This means that capital wont be lost when exiting the market High barriers to entry In terms of sunk costs and Infrastructural costs. Providing services costs a lot ot money (le first class cabins) There Is competition between companies so new tirms can enter and make normal profits There are dominant tirms in the market, there will be brand loyalty which reduces contestability as new firms will have to compete on onprlce factors to gain loyal customers and to compete with other firms. an example being british airways and virgin: BA has a calm quiet in air craft experience and Virgin airlines offer a lively talk promoting atmosphere where even the airhostesses try and get conversations going) Access to the same level of technology. this means that the costs each firm take on from technological aspects such as inflight services and ways of booking are the same so it doesnt stop competition as there is no LISPS.
The bigger firms can exploit economies of scale as they produce at lower average unit cost compared to new firms entering the market which do not have perfect information about cheap suppliers or bulk buy to get big discounts, the low cost airline market is more contestable than normal airlines use of the Internet to reduce distribution Costs Maximise the utilisation Of the aircraft assets Direct sell only Via the net Ticketless travel NO free airline food one kind of aircraft: commonality max’mlses efficiency in the recruitment and training of staff Predatory pricing can occur In the short which can drive away new firms, they reduce heir profits below average costs and cover with saved revenues till the new firms cannot make any profit and they exit the market.
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