Oligopoly Market

Topics: Airline, Low-cost carrier, AirAsia Pages: 22 (6771 words) Published: November 18, 2011

As we can see, this assignment requires us to have an understanding on the oligopoly market, which is one of the most sought after market condition which is being applied in many sectors, including banking, airline and car industry. Many large organizations are involved in merger and acquisition to strengthen its position besides expanding their market share. As example, Hong Leong Bank completed a takeover on EON Bank to consolidate its position as one of the major bank in Malaysia (Bloomberg, 2011).

Oligopoly market is defined as a market that consists of a small number of large players (Begg & Ward, 2009). In Malaysia, airline and banking industry are two industries that have small numbers of large players. As we can see, there are certain characteristics that we could observe from oligopolistic market. The first characteristic is that the entry barriers to the market are high, thus controlling the number of players joining the market (Begg & Ward, 2009). Entry barriers exist that allow a handful of firms to achieve economies of scales, but no more beyond that. Any new firms would have too small a market share and would have to produce at too high a price  Additional sources of barriers to entry often result from government regulation favouring existing firms making it difficult for new firms to enter the market.

The second characteristic of oligopoly is that it produced homogenous or differentiated products (Begg & Ward, 2009). For homogenous products, industries in these markets produce intermediate goods which are use by other different industries later on for manufacturing the products. Examples are raw materials such as petrol. As for differentiated products, goods manufactured in these kinds of markets are for personal consumption as they have different needs and wants.

Another characteristic that we could derive from oligopoly market is that the firms are interdependent of one another. In oligopoly market, each firm is so large that its actions affect market conditions. Their competition is based on belief about possible reaction of rival’s price and non-price competition, such as advertising and promotion.

For this assignment, we will look at the airline in Malaysia, which were once monopolistic, but moved into oligopoly condition with emergence of low cost carrier, AirAsia. AirAsia is one of the best low cost carriers in the world and it is worth to look at to understand how they manage to capitalize on the market share of airline industry.

Background of AirAsia

AirAsia was established in 1993 and commenced operations on 18 November 1996. It was originally founded by government-owned organization, DRB-Hicom. Due to heavy debt, it was bought by former Time Warner executive Tony Fernandes’s company, Tune Air Sdn Bhd in 2001for the token sum of RM 1.00. He renegotiated lease agreements on its two aircraft and reinvented AirAsia as a low cost carrier. AirAsia endures a turbulent time in its early days of establishment due to the disasters that had shaken toe whole world, including airline industry. The September 11 terrorist bombing create havoc all over the world and airline industry was affected as a result. Besides that, an accidental collision with a bird which grounded one of AirAsia’s two planes, the terrorist bombing in Bali and the regional SARS epidemic spelt challenging times for the low cost carriers.

AirAsia was also forced to relocate its operational hub to the more expensive KLIA following the closure of Subang Airport. Tony Fernandes proceeded to manage a remarkable turnaround, turning a profit in 2002 and launching new routes from its hub, undercutting former monopoly operator Malaysia Airlines with promotional fares as low as RM1. They also manage to double its fleet to four planes, and continued to grow its operations in terms of flying destinations and frequencies.

Today, AirAsia is one of the award winning and largest low fare...
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