The Oligopoly Market
The airline industry is an oligopoly market in the United States. It is dominated by five major players who combine to earn over 70% of the industry’s revenues (Hüschelrath & Müller, 2013). These players include Delta, Southwest, United, and U.S. Airways. However, Delta leads in market share by controlling 16.8% closely followed by Southwest with a 16.6% while American and United control 12.5% and 15.2% respectively (Reed & Reed, 2014). It is clearly dominated by a few firms in the midst of other smaller firms. These four carriers control more than 60% of the industry (Puller and Taylor, 2012). The barriers to entry are huge due to the high capital required to join the industry. The other point that makes the U.S. airline an oligopoly is the fact that it has been blamed for practicing collusions. This has called for government intervention to avoid consumer exploitation from hiked prices.
The airline industry concentrates more on video marketing as their most reliable form of advertising. However, the players are always on the lookout for the actions of other players in the industry. Advertising plays a huge role in the U.S. airline industry due to the high number of price wars and collusions that define the industry. A firm such as Delta Airlines will wait until one of its competitors advertises for lowered prices to determine how it will counter. According to Aguirregabiria and Ho (2012), the major airlines in U.S. are stifling competition through hindering the ability of customers from accessing the internet to compare ticket prices. This has contributed to more incentives for advertising. This is consistent with how firms behave in an oligopoly. If one firm decides to undertake rigorous advertisement, other players consider their moves and act accordingly to take the advantage.
The U.S. airline industry is an oligopoly. It is dominated by a few firms that control over 50% of the industry. Airline companies such as Delta, Southwest, United, and U.S. Airways carriers compete through pricing. The price of airline tickets is influenced by the time of travel, class of travel, length of stay at destination, and so on. It has been easy for them to record high profits from controlling the industry. As long as it continues to be dominated by a few firms, the U.S. airline industry will still be an oligopoly.
Aguirregabiria, V., & Ho, C. Y. (2012). A dynamic oligopoly game of the US airline industry: Estimation and policy experiments. Journal of Econometrics, 168(1), 156-173.
Hüschelrath, K., & Müller, K. (2013). The competitive effects of firm exit: Evidence from the US airline industry. Economics of Transportation, 2(2), 72-85.
Puller, S. L., & Taylor, L. M. (2012). Price discrimination by day-of-week of purchase: Evidence from the US airline industry. Journal of Economic Behavior & Organization, 84(3), 801-812.
Reed, T., & Reed, D. (2014). American Airlines, US Airways and the Creation of the World’s Largest Airline. McFarland.