Australian Airline Oligopoly

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Topic A (oligopoly) An oligopoly is defined as "a market structure in which only a few sellers offer similar or identical products" (Gans, King and Mankiw 1999, pp.-334). Since there are only a few sellers, the actions of any one firm in an oligopolistic market can have a large impact on the profits of all the other firms. Due to this, all the firms in an oligopolistic market are interdependent on one another. This relationship between the few sellers is what differentiates oligopolies from perfect competition and monopolies. Although firms in oligopolies have competitors, they do not face so much competition that they are price takers (as in perfect competition). Hence, they retain substantial control over the price they charge for their goods (characteristic of monopolies). In my discussion I will use the Australian airline industry to present how oligopolies operate, and to show the different behaviours and strategies that arise from the interdependence of firms. I will mainly concentrate on the domestic airline market in Australia. The domestic airline market consists of a duopoly of two firms, Qantas and Virgin Blue. Since Qantas and Virgin are the only two Airlines supplying domestically in Australia, they account for all of the profits in the market and consequently they are in direct competition with each other. Because only two firms are competing, each firm must carefully consider how its actions will affect the other, and how its rival is likely to react. Thus, strategic considerations regarding the behaviour of competitors in this duopoly are essential in order for Qantas and Virgin to set prices. "Game theory is often used as a model to analyse the strategies of individuals or organisations with conflictin... ... middle of paper ... ...a pp.-333-355. Hocking and Waud 1992, `Oligopoly and Market Concentration' in Microeconomics 2nd Edition, Harper Educational Publishers, NSW, pp-315-342. Kathleen Hanser, `The Secret Behind High Profits at Low-fare Airlines'. http://www.boeing.com/commercial/news/feature/profit.html [accessed 15 May 2003] `Qantas profit up, cuts loom'. http://finance.news.com.au/common/story_page/0,4057,6012725%255E462,00.html [accessed 18 May 2003] `Virgin Blue's $158 million profit' 15 May 2003, http://www.travelbiz.com.au/articles/78/0c016978.asp [accessed 17 May 2003] David Greig, `Another cosy duopoly is likely', 28 February 2002.

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