Type Of Market Structure Of The Airline Industry Economics Essay

The type of market structure being discussed in regards to the airlines for fixing the price of air cargo is oligopoly. The market can be divided into 4 types which are monopoly, oligopoly, imperfect competition and perfect competition (Begg and Ward, 2009). The main characteristics that make up oligopoly are small number of large firms which are relatively large to the overall size of the market causing substantial market control. The extent to which the firms may control the market depends on the number and size of the firms (Begg and Ward, 2009). The other characteristic is the production of either Standard/Identical or Differentiated products. An oligopolistic firm concerned with homogeneous products, produces and processes raw materials that are often used as the input or base materials by other industries (Begg and Ward, 2009). Differentiated product systems ensure providing a wide variety of consumer goods to attain their customer’s satisfaction. The third one is entry barriers because firms who are a part of an oligopolistic market acquire and maintain their market control by keeping high entry barriers which induces literally an impossible situation for other potential firms to enter the respective industry. Even though this type of market has fixed characteristics, there are some behavioral tendencies that oligopolistic industries tend to exhibit, such as each firm keeping a watch on the rest of the other affiliated firms. A decision made by one firm can either directly or indirectly affect the other firms. The prices are fixed as these constant prices are kept by majorly all the firms. The final characteristic is relying on non-price methods of competition as well because the aim is to keep the price on one line while increasing the market share. This may be achieved by advertising, product differentiation and entry barriers or by merging two firms into one which could result in a greater market control.

1B)    Cartel / Collusion is an informal secret agreement between existing firms to avoid competition (Begg, 2006). The firms cooperate with each other in order to create monopoly to achieve higher profits. The European Union had lead a probed investigation into the price fixing of the air cargo after alleged collusion charges, namely by Lufthansa Airlines, who provided the first information about the collusion (supplychainstandard.com). The EU competition law explicitly forbids cartels in Article 81 on price-fixing / control of production, the two more frequent cartel-types of collusion. In the Law it explicitly indicates that heavy fines are imposed for violations and in a leniency agreement the first to withdraw of collusion agreement is free of any responsibility. This has helped a lot in detecting cartel agreements in the EU. This law prompted Lufthansa to alert commission about the cartel. The issue began with the firms looking to discuss the fuel surcharges that were taking toll. The carriers contracted that they would impose surcharges per kilo for all shipments and they did this by inducing security charges and did not pay of any of the earned commission from the security surcharges to the concerned subjects, who were the freight forwarders in this case. The base of this agreement was initiated by explicit agreements among the firms to fix output and prices. The incentive on cooperation would be earning monopoly profits. They achieved this by levying the same surcharges for all carriers and any price fluctuation in price would apply to all the airlines. According to the agreement if any carrier offers lowered prices to customers they will not receive any incentive payments. This violated the Eurpoean Union’s Competition rules and hence qualifies for penalty on the Airliners.

1C)  Airliners had engaged in a Formal Collusion / Global Cartel by forming an association affecting market control by maintaining prices at a high level and thus restricting competition. Their aim is to increase their share of the markets and hence increasing their profits. Rival Airlines kept their joint interests ahead of rivalry and competition and came to this conclusion that by cooperating they can collectively increase profits. The linkage to theory of Competition and monopoly has been an important factor for firms to surrender to formal cartelization. A monopolistic market has an ‘inelastic’ demand causing it higher profits but the collusive market has fewer producers on the market and thus they have to strive harder to stay on the market. 

2A)

The awfully surprising declination of the economy by 0.5% in the last three months of the year 2010 put the entire nation in shock particularly because the economists had anticipated the growth to be risen around by 0.2-0.6% (telegraph.co.uk). The economic recession or slump was blamed on the bad weather of icy snow. It was predicted around early December that if the icy weather persisted,  the loss to businesses could amount up to almost 6 billion, since the workers would be unable to access their workplaces due to lack of transport (bbc.co.uk). Economists argue that regardless of the unfavorable weather conditions, the economy would still have deteriorated mainly because of the recession in the construction sector. It was noted to have gone down by 3.3% by far the most severely hit sector followed by the mining sector which also suffered a percentage drop of 2.5% as evident in Figure 2 (See Appendix).

2B)

The public has fears of a double dip, but the Government believes otherwise (telegraph.co.uk).

There are possible factors that could help the economy, but the stabilization of it remains a question mark. The biggest confidence boost should be by the manufacturing growth, which showed an increase of GDP by 0.6% last year. The Government believes that the growth will not be as steep as was predicted for the year. But they commit to going on with huge reduction in budget and notable budget cuts plus the borrowing of lesser money, hence lesser the debt. Limitations shall be there as the VAT (Value Added Tax) is 20%. The unemployment shall be on the rise again especially with the oil prices rising. 

3A)    

Free trade is extremely advantageous when experiencing comparative advantage. In order to progress, countries sell goods that they can produce at very low costs and buy those services and products that would be more costly to produce. The principle of comparative advantage is based on opportunity costs. Opportunity costs are the benefits forgone from the next best alternative (Begg and Ward, 2009). Potential trading partners can gain substantially by proper specialization and exchange. The advantages of free trade are increased production and efficiency enabling countries to specialize in creating commodities where they have the comparative advantage. International trade increases market size, decreasing the productions costs and raises productivity. Increased productivity increases a countries efficiency through which they achieve better allocated resources at a cheaper price from other countries. The efficient use of these resources leads to more production, increasing the domestic output. Increased branding means more market competition which in turn helps in creating new methods and technology for production of goods. There are also benefits to consumers such as free trade leads to a global market and consumers benefit the domestic services by having a wide array of varieties. The market competition makes sure that all the services are provided at the most economical rates. It can also boost employment as jobs in the trade market increases when the productivity increases. Because trade liberalization allows resources to shift to more productive areas, absolute employment increase would be seen in the exporting industries. This in turn leads to a higher economic growth as lowering trade restrictions increases the gross domestic product. GDP can viewed as national income which is divided into components like Consumption, Investment, Government Spending and Net Exports, depending whether the scenario is for an open or a closed economy (Begg and Ward, 2009). This causes a higher standard of living, increased incomes and ultimately higher rates of economic growth. When a country sells exports to another country, it receives money in exchange for the real goods. But that money can be used only in the country importing those goods, hence causing a foreign exchange gain. International trade means global market, consequently increasing the country’s income. Countries that reduce trade restrictions have better growth chances than countries which do not. For global trade, countries must work together professionally. Working closely creates mutual respect for the respective organization’s culture and customs, eliminating any sort of discrimination.

3B)

A tax imposed by the government of one country on imports from another country allows reduced import and increased domestic production. Tariffs increase the demand price and reduce the supply price causing a lower amount of goods to be exchanged. The imposition of tariffs is justified to protect the domestic production by restricting foreign competition. The other key reasons are domestic employment as imports are goods manufactured by workers in other countries by foreign workers. Reducing the import would mean increasing the domestic production which would require a higher employee rate. Low foreign wages when stable competitive field is induced by keeping tariffs on imports which are produced by foreign people working for a lower salary compared to local goods produced by better paid domestic employees. Novice industries are protected by the government when they are relatively new in the market and not large enough to compete or benefit from economies of scale. National security is another reason when some goods can be critical to the security of the domestic economy. Posing of tariffs discourages the import of such goods. Unjust trades can be another reason when a lot of times the foreign producers engage in means of unfair trade practices by dumping imported goods at prices lower than the actual production cost.

Under normal circumstances, dumping would be carried out in order for producers of one country to stay competitive with producers in another country. This can be due to eliminating the opposing producer to gain a larger share in the market. It also helps in ridding of the stocked up goods that the producers are unable to sell off in their own local market. Producers also have the advantage of separating the two local and international markets at their own terms and charging each according to the affording potential of the purchaser. Selling goods at a higher price to a domestic buyer and decreasing its price, even below the production costs to a foreign nation is a practice followed around the world. As stated above, the US initially raised the tariffs on the Chinese tires in response to which the Chinese government imposed its tariffs on US poultry. The anti-dumping tariffs were placed against the import of US chicken meat for five years because the Chinese producers were economically being slashed by the import of the US chicken goods that were being sold far below the cost of the production.

The original issue arose in September 2009 when the US government placed a 35% tariff on Chinese automobile, two days after which the Chinese government probed investigation in to the chicken import trade. After extensive investigations, the Chinese imposed tariffs of the US imports ranging between 43.1% to 104.4%, the lower tariffs being for those companies that offered assistance in the investigations. Business would be seen to come at a competitive disadvantage for a long times because the Chinese export prices would fall lower and the imports from the US would be considerably high.