Case Study – Indigo Airlines: Monopolizing Indian Skies

Karina Cardozo, Gabriela Lozano and Paula Silva

Explain why the situation of the Aviation Industry in India presented in the case
fits the Theory of Oligopoly.

According to the Knickerbocker system, an oligopoly is a structure characterized by

having few sellers, products that are close substitutes, and the existence of
substantial market interdependence between the competitive policies of these firms.
We can see this concept evidenced in the situation of the Indian aviation industry,
whose market was dominated by LCCs due to the extreme price sensitivity of Indian
consumers, likewise, we see imperfect competition where a limited number of
companies dominate the industry. In the case we see an oligopolistic structure
reflected in which the behavior of the companies can be related, as Knickerbocker
(1973) mentions, with a chess game in which each company makes a move to have a
better position and said movement generates a reaction of the other companies
without ceasing to be interdependent strategically speaking, that is why the prices
remained fixed for a long period and instead of making a price fight, the airlines
looked for a way to reduce costs through innovation.

Why have prices remained sticky (rigid and resistant to change) for economy
class passengers in the Indian Aviation Market?

We see that in the Indian airlines market prices remain rigid and resistant to change
as none wanted to raise prices despite the fact that costs kept increasing, because
raising prices while rivals stay with the same would affect their competitive
advantage, on the contrary, if prices fell, all airlines would seek to follow the trend,
obtaining perfect competition as a result. From the above, we see evidence of one of
the characteristics of oligopoly and that is that when a price is established in the
market, it is preserved for all, this is because, as Knickerbocker (1973) mentions,
companies are interdependent and cannot create strategies. or action plans
independent of the market. In this case, it is clear how to increase ticket prices was
out of discussion for most routes, so they stayed stagnant and the only solution they
determined was to achieve technical efficiency and economies of scale.

Is there a “Oligopolistic Equilibrium (Knickerbocker, 1973) in India’s aviation

industry as it is now? What can disrupt or have disrupted this equilibrium?

Based on the reading, it can be seen that the Indian Aviation Industry had a major
oligopolistic phenomenon in which all companies would face the strikes of
competitiveness and market losses caused by irregular management of resources
and the quality of the service. In this scenario, IndiGo arose with unique strategies
that led the company to gaining a larger market share but also to understanding with
much more detail and accuracy the market they were in. Unlike other competitors,
IndiGo did pay attention to the opportunities the Indian market was giving and took
advantage of the consumer behavior on flights and their expectations. This situation
caused an oligopoly arena in which IndiGo made its way in through the competitors
that started to fail and lose their position in the market. As of now, research shows
that, due to liberalization and government intervention to boost air connectivity, more
companies are entering the aviation industry to compete and settle a highly valued
position for Indian consumers. With that said, there’s a marked difference when it
comes to analyzing what the aviation industry and its players were like back then
compared to the growth and enhancement of the sector nowadays thanks to a
combination of factors that create a more demanding, competitive, and ever-shifting
industry for both the players and the consumers (Singh, 2023).
According to Knickerbocker (1973) “The product life cycle can explain why the
first firm to pioneer a product will want to expand its activities abroad via FDI;
the forces that lead to the development of new products lead to an oligopolistic
structure at home and to the search of FDI opportunities” what does he mean
with this affirmation? Do you think that this situation is illustrated in the case?
Please explain and provide specific examples.

Knickerbocker stated that introducing innovative services or products for large

markets and managing the organization of production and the necessary continuous
adaptation in the first stage of the life cycle, would be the fundamental inducement
towards FDI, as it “creates opportunities for product development leading to a
continuous stream of products that respond to the demands of high income per
capita consumers and/or the need for labor-saving devices for the consumer or
producer.” More so, this means that the pioneer firm will tend to develop
sophisticated techniques and use them vigorously, which would give them a certain
advantage over foreign firms that may not match such skills and capabilities,
evidencing the success they would have with FDI. “There is a link between product
pioneering, and thus the product life cycle, and oligopolistic structures. Firms that
operate in fast-changing industries and are, therefore, involved in new products and
new developments are also likely to experience various advantages.” Ietto-Gillies, G.
(2012). As mentioned before, the product life cycle model shows that the main
inspiration of pioneer firms for FDI is the desire to exploit overseas the novel skills
that they acquired while satisfying the domestic demand. Letto-Gillies (2012),
explains this in one sentence: “The product life cycle can explain why the first firm to
pioneer a product will want to expand its activities abroad via FDI; the forces that
lead to the development of new products lead to an oligopolistic structure at home
and to the search for FDI opportunities.”

In relation to the Indigo Airlines case, this affirmation is shown with their four key
strategies to achieve profitability. With a dynamic pricing model, its aircraft
management strategy, unique expansion strategy (gradually adding aircraft), and
building its reputation for on-time performance, they developed a specialized service
that met the needs of the domestic market, giving them an advantage over local
airlines and, by considering foreign direct investment, they could stand out from
some airlines in the international market.

Can you affirm that the aviation sector in India exhibits “Bunching up”
(Knickerbocker, 1973) in terms of industries, countries, and timing? If so,
explain why this happened.

In this case, bunching up would be rivals following the move of the first firm and
engage in defensive foreign investment. Therefore, Knickerbocker explains the
bunching up of FDI as the result of firms’ defensive policies, which are designed to
minimize risks in an oligopolistic market structure (letto-Gillies, G. 2012). The aviation
sector in India do exhibits “bunching up”, if we analyze that all companies used the
dynamic prices (DP) model, for example, any attempt on IndiGo´s part to raise prices,
was met with instantaneous price cuts by its rivals, since all of them followed DP.
Also, the introduction of Air Deccan, with its very low prices, forced all other
operators to reduce their fares, and the aviation sector witnessed a price war. A firm
takes the weel in a certain part and all the other firms engaging in the oligopolistic
environment will react and most likely follow what's working for others.

References
Ietto-Gillies, G. (2012). Transnational corporations and international production:
concepts, theories and effects. Edward Elgar Publishing.
Singh, A. (2023). The Sky’s the limit: India’s Growing Aviation Industry. Invest India.
https://www.investindia.gov.in/team-india-blogs/skys-limit-indias-growing-
aviation-industry