‘Singapore Airlines (SIA) said it has no plans to take an equity stake in its bankrupt alliance partner United Alliance.’a)Describe the type of competition that exists in the airline industry. (10)b)What are the microeconomic options that are opened to Un

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Q


Part (A)


The type of competition that exists in the airline industry is an oligopolistic one. Oligopolisitic firms usually firms usually sell differentiated products or homogeneous products. Clearly, the airline industry may be providing a homogenous service of air flights, but differ in their departure and arrival destinations. Airline industry faces many barriers to entry. A few big firms, like Singapore International Airlines, Virgin, Emirates and many more, also usually dominate it.


The barriers of entry are usually restrictive into allowing new competitors to enter into the market. The issue of product complexity comes in when there is a necessity to provide consumers with efficient services, along with the airline service. As consumers need to learn a lot about the product before purchasing it, efficient services has to be provided to help consumers make an informative purchase. Certain firms fail to provide this service, thus are unable to enter into the market. Thus, airline firms usually set up information booths, provide baggage services and publish informative brochures, to make up for the product complexity.


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Another barrier to entry is the presence of product proliferation. Though the product may be of one type, it is usually proliferated through increasing the variety as a barrier to entry, as new firms may not be able to fight with the diverse fashions of the similar product already available in the market. In terms of the airline industry, they provide a diversified type of airline service. We have the economy class type of airline service, the business class and many other types of differentiated airline services.


Another barrier of entry is also the recognition of the product. It may be so, that the product is so well recognized by the market that new firms are not able to meet up to the expectations of the consumers, thus are unable to enter into the industry. This is very true for the airline industry, as airline services are already well recognized in many countries, thus it makes it more difficult for a new competitor to enter.


Economies of scale is also another barrier to entry, in the way that new firms may not understand the economies of scale earned in the line of business, thus refuse to enter into the industry. For airline services, the economies of scale may be quite complicated and the new competitor may not be able to handle it.


Another feature of oligopoly is that there is also both price rigidity and non-price competition. We usually see the price of the different airline services being similar, depending on the destination of the flights. Also, on magazines and televisions, we see Singapore international Airlines, Emirates and the Malaysian Airlines advertising their airline services.


Thus, we can see how the airline industry is an oligopolistic sort of market structure.


Part (B)


Usually for firms facing bankruptcy, they have two microeconomic options to make, either face acquisition or shut down all operations. AS the fact that United Airlines is bankrupt, it certainly has no capability to pursue other options to salvage it.


Referring to shutdown conditions, if the firm is facing bankruptcy in the short run, as long as it is able to cover its average variable cost (AVC), it should continue production. Or else, it should shut down. In the long run, as AVC equals to total average cost (all costs becomes variable in the long run), firms should shut down if it fails to cover its total average cost.





From the graph, we can see that AC is higher than P=AR, which means the firm, is earning subnormal profit. This means that the firm has to consider whether its AVC is above P=AR. In the case of the graph, this means that the firm is able to cover its AVC. If United Airlines is facing this kind of a situation, it should continue production.


However, if in the long run, United Airlines is not able to cover its total average cost, as average fixed cost has become variable like average variable cost, the firm should shut down. Likewise, in the short run, if AVC is above P=AR, it should also shut down.


Or else, United Airlines can consider being acquired, or as a euphemism, choose to merge with a more competitive firm. Merger or acquisition can be seen as two or more separate firms coming into a single ownership. This includes, vertical integration where firms merge in the different stages of production, horizontal integration, where firms merge in the same stage of production, and conglomeration, where a firm merges with another of a totally different production line.


This can help bring many benefits to united Airlines, especially with the gaining of economies of scale and cost savings. The firms can even gain supernormal profits, to engage in innovation or even gaining monopoly power.


However, United Airlines can face conflicts in administrative matters and diseconomies of scale sets in much earlier than expected.


In conclusion, United Airlines should take into account its reputation and ability to cover AVC before making any decisions.





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