Competitive Pricing Strategies of Low Cost Airlines in the Perspective of Game theory
Lim Seng Poh+ and Mohd. Ghazali bin Mohayidin
Open University Malaysia
Abstract. Price is the weapon of choice for many low cost airlines in the competition for market share. Regional low cost airlines’ pricing strategy for market stimulation is issuing free tickets and competing in ticket prices setting. It has been assumed as an effective strategy in influencing customers’ purchasing decision. This study has documented the differences in price setting dynamics across low cost airlines operating on one of the biggest regional market and six domestic routes. A total sample of 7883 fare quotes for nonstop travel from Kuala Lumpur to Singapore and 6 domestic routes have been examined. The employment of Granger Causality Test attempts to mathematically capture the competitive behaviour in price setting. The data evidence revealed the reality of price competitiveness among the low cost airlines and game theory suggests that price cooperative should be implemented by low cost airlines for long term sustainability.
Keywords: Low cost airlines, Pricing Strategies, Game theory
Business is a high staked game. Branderburger (1995) notes that essence of the business success lies on playing the right game. In the context of oligopoly and duopoly low cost airlines market structure, an airline company that lower the price of its tickets will affect not only its own profitability but also the profitability of its competitors since a lower price will influence consumers’ decision making. Regional low cost
airlines’ pricing strategy for market stimulation is issuing free tickets and competing in ticket prices setting. It has been assumed as an effective strategy in influencing customers’ purchasing decision, nevertheless, predatory price setting implied unethical business strategies, “zero sum game” method will leads one party exits from the industry. (John 1944 ) in his game theory posits the cooperative and non cooperative approaches to business games and social situations in which participants must choose between individual benefits and collective benefits. The games involved scenarios where participants must make decisions that affected not only the individual participants but also all the other participants as well. It has been used as a tool in economics to analyze competitive situations where the players of the game (companies) attempt to maximize their performance in strategic situations. Their success depends on their choices and how their competitors react to their choices and make choices in response. The phenomenal growth of low cost airlines has triggered the interest of people to believe that they will become successful mainly due to their pricing strategy. Nevertheless, in a turbulent business environment (rising investment risks, intense competition among airlines and potential liability), there is a greater uncertainty and challenges to the success of the airlines’ existing pricing strategy in fulfilling expectation of the customers. In the attempt to provide further insight into the link between price setting behaviour of the
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low cost airline, this research presents an empirical research on the questions of the competitive pricing strategies of low cost airlines and the degrees of competitiveness.
Based on game theory Choi and Sharan (2004) carried out the research on pricing under risk aversion and uncertainty. Their findings showed that under well defined condition the firm may be “a first mover” as the Stackelberg price leader however if the firm is under the highly uncertainty of demand conditions then it is necessary for the price leader to share market...