For the UK airline industry discuss the way in which its market structure affects the ability for firms to set prices and to make profits. (16 marks)
Market structure is the state of a market with respect to the degree of competition amongst buyers and sellers. The market structure of the industry helps to determine its ability to set prices and make profits. The UK airline industry contains a number of different types of companies from budget airlines to private jets, but is essentially is an Oligopoly. This is due to the very high barriers to entry and the relatively small number of large firms due to this.
Within the UK airline industry there is potential for collusion due to the small amount of large companies which means that there is potentially the ability for firms to set prices. In fact in 2007 British Airways was 'fined about £270m after it admitted collusion in fixing the prices' after it held illegal talks with rival Virgin Atlantic. Price colluding or setting prices is illegal as it prevents potential competition from happening meaning that consumers may not get the best service for the best price. Price setting also benefits the companies far more that consumers as it reduces the companies competition on price helping them to make abnormal profits.
As the UK airline industry is an oligopoly which typically prefer non price competition in order to avoid price wars. In an oligopoly the firms are interdependent and take into account likely reactions of their rivals to any change in price, output or forms of non-price competition. In perfect competition and monopoly, the producers did not have to consider a rival’s response when choosing output and price. The kinked demand curve can be used to support this,
elastic - rivals wouldn't-amour pro
- - _ _ -
-rivals more likely to follow
It assumes that a business might face a dual demand curve for its product based on the likely reactions of...
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