Exploring the Dynamics of Oligopoly in Real-World Industries

Nyan Lin Htut

Department of Business Management, University of the People

BUS 1103 - Microeconomics

Mrs. Kristine Beaird (Instructor)

Word Count: 853 words

March 17, 2024

 Exploring the Dynamics of Oligopoly in Real-World Industries

An industry that represents an oligopoly is the airline industry. Oligopoly is characterized by a

small number of large firms dominating the market, high barriers to entry, interdependence

among firms, and non-price competition. Factors contributing to the establishment of an

oligopoly in the airline industry include high fixed costs, significant barriers to entry due to

regulations and infrastructure requirements, and the control of key resources such as airport slots

and routes.

1. Characteristics of the Airline Industry

 The airline industry is characterized by high fixed costs, including aircraft, maintenance, and

infrastructure.

 It is highly regulated by government authorities, with strict safety and security standards.

 The industry is sensitive to economic cycles and external factors such as fuel prices and

geopolitical events.

 Airlines compete on price, service quality, and route networks to attract passengers.

 There are significant barriers to entry due to high capital requirements and regulatory hurdles.

Factors Contributing to Oligopoly in the Airline Industry

 High Barriers to Entry: The substantial capital investment required to start an airline limits

new entrant, leading to a small number of dominant firms.

 Economies of Scale: Larger airlines benefit from economies of scale, reducing average costs and

making it difficult for smaller firms to compete effectively.

 Product Differentiation: Airlines engage in non-price competition, offering unique services and

loyalty programs, leading to product differentiation rather than price competition.

 Strategic Interdependence: Actions of one airline directly impact others, leading to strategic

interdependence and a tendency to match pricing and capacity decisions.

 Regulatory Barriers: Government regulations and bilateral agreements between countries can

limit competition and contribute to the establishment of an oligopoly.

2. Market Imperfections in Oligopolistic Airline Industry

Oligopolistic structure in the airline industry leads to several market imperfections, including:

 Price Rigidity: Airlines in an oligopoly tend to engage in price leadership, leading to price

rigidity. This can result in higher prices for consumers and reduced allocative efficiency.

 Non-Price Competition: Oligopolistic airlines often compete through non-price strategies such

as frequent flyer programs, in-flight services, and flight schedules. While this can benefit

consumers, it can also lead to inefficient allocation of resources.

 Barriers to Entry: High barriers to entry, such as high capital requirements and limited airport

slots, make it difficult for new airlines to enter the market. This reduces competition and can lead

to higher prices and reduced consumer choice.

 Collusion and Cartels: Oligopolistic airlines may engage in tacit collusion or formal cartels to

control prices and output, leading to anti-competitive outcomes and consumer detriment.

 Capacity Utilization: Airlines in an oligopoly may engage in strategic capacity utilization to

maintain market power, leading to underutilization of resources and inefficiencies in the

industry.
 These imperfections can result in market inefficiencies, reduced consumer surplus, and potential

welfare losses.

3. Market Outcomes and Oligopoly Influence in the Airline Industry

Market outcomes refer to the results of interactions between buyers and sellers in a market,

including the allocation of resources, distribution of goods and services, and pricing. In the

context of the airline industry, market outcomes can include ticket prices, route availability,

service quality, and industry profitability.

Oligopoly Influence on Market Outcomes in the Airline Industry

Oligopoly, a market structure characterized by a small number of large firms dominating the

industry, can significantly influence market outcomes in the airline industry. Here's how:

 Price Competition: Oligopolistic airlines may engage in tacit collusion, leading to price stability

or even price wars, impacting consumer choices and industry profitability.

 Product Differentiation: Airlines in an oligopoly may focus on non-price competition, such as

offering unique services or loyalty programs, influencing consumer preferences and market

outcomes.

 Barriers to Entry: High barriers to entry in the airline industry, such as high capital

requirements and regulatory hurdles, can limit competition, affecting market outcomes like route

availability and service quality.

 Strategic Interdependence: Oligopolistic airlines closely monitor and react to each other's

actions, leading to strategic interdependence that can shape market outcomes, such as capacity

expansion or reduction.
 Market Power: Oligopolistic airlines may possess significant market power, allowing them to

influence market outcomes through control over pricing, capacity, and industry standards.

Overall, oligopoly in the airline industry can impact market outcomes by influencing pricing,

product differentiation, barriers to entry, strategic interdependence, and market power, ultimately

shaping the experiences of both consumers and industry participants.

4. Impact on Economic Efficiency and Equitable Distribution

The oligopoly market structure impacts economic efficiency by potentially leading to

underproduction, allocative inefficiency, and reduced innovation due to reduced competitive

pressure. Equitable distribution of resources is also affected as oligopolies may lead to unequal

market power and potential exploitation of consumers. However, in some cases, oligopolies can

lead to economies of scale and investment in research and development, which can benefit

consumers.

In comparison to perfect competition, the oligopoly market structure may not be more efficient

due to the potential for market power abuse, reduced consumer surplus, and inefficient allocation

of resources. However, the presence of economies of scale and potential for innovation in

oligopolies should be considered when evaluating efficiency.

In conclusion, the airline industry's oligopolistic structure demonstrates the complexities and

trade-offs associated with market imperfections, economic efficiency, and equitable resource

distribution.
 References

John Wensveen (2023). Air Transportation: A Global Management Perspective. Taylor and

Francis.

Shapiro, D., MacDonald, D., Greenlaw, S. A., Dodge, E., Gamez, C., Jauregui, Andres., Keenan,

D., Moledina, A., Richardson, C., & Sonenshine, R. (2023). Principles of microeconomics (3rd

ed.). OpenStax. Licensed under CC 2.0