• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Airline Industry and Contestability Project - What is a contestable market?

Extracts from this document...

Introduction

Airline Industry and Contestability Project What is a contestable market? In a contestable market, there are one or a number of firms which profit maximise. In other words the number of firms is irrelevant. The key assumption to make here is that barriers to entry to the industry are relatively low, as is the cost to exit the industry. The existence of potential entrants into the industry will tend to keep profits to their normal level even in the short run, because existing firms will want to deter new entrants from coming into the market. Contestable markets are both productively and allocatively efficient and are likely to be efficient in the short run as well. The theory regarding the type of profit made in a contestable market is this. Abnormal profit can only be made in the short run, only normal profit will be made in the long run. The reason being is that when firm try to profit maximises in the short run then this will attract new entrants into the market to take some of this profit away from the existing firm. As more competition is attracted then the new prices will force the prices and the profit down. ...read more.

Middle

As the population of Europe has more disposable income the demand for short haul flight from city to city has increased. This provides an opportunity for low cost airlines to enter the industry and compete with the major airliners. As there is price sensitivity in the airliner market, it is naturally suited to low cost airlines, as customers will choose them instead of another. An act called "freedom of the air" means that an airline holding a valid Air Operations Certificate in the EU can't be prevented from operating on any route within the European Union, including flights wholly within another country. Granting these freedom rights makes the market more contestable, because any airline with a valid license can fly passengers. Airlines enjoy substantial tax exemptions, particularly from all taxes on kerosene. This exemption for kerosene applies to international and intra-EU flights alike. This tax exemption for fuel provides no incentive for airlines to use the most efficient aircraft and to contribute to reducing CO2 emissions (of which air transport accounts for 13%). It also creates situations where the competition between air transport and other modes is unfair. This exemption makes the market more contestable as airliners have no pressure to keep pollution low, so if more airliners enter the market complaints of more pollution can be ignored. ...read more.

Conclusion

Another reason why it may be less contestable is that they have received many customer complaints for quality of service. In a less contestable market firms are under less pressure to produce a service of the highest quality. Recent mergers involving Easyjet and Ryanair have meant that the industry is being dominated by two big firms. This is an example of a Contestable market, because there is less competition and these larger firms will benefit from economies of scale such as brand loyalty and these firms will have more slots for taking off or landing, which reduces the amount of competitors that can enter. The reason why it may be contestable is that in the industry there are lots of profits to be made. An increase in Ryanair profits would attract "hit and run" competition. Another reason is that Ryanair was able to purchase a Boeing 747 at a significant discount. This means that there will be low sunk costs as these planes could be sold off if you decide to exit the industry. To conclude it can be said that the low cost airline industry is seen as contestable, because of the east to set up, excess profits, but recent news show that it is more becoming less and less contestable with mergers and few firms producing at low cost and really dominating the industry. Airline Industry and Contestability Imran Hans 1 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. The structure of the airline industry.

    One of the key components that has allowed AirTran to obtain such awards as mentioned above and enable them to lure new customers in the future is the changing of their fleet from 737's and DC-9's to the much more reliable and cost effective Boeing 717's.

  2. To what extent is the UK airline industry a contestable market?

    If a contestable market only consists of few large firms, the costs differences among the companies are only from the distinction of price and quality, thus the number and size of firms are irrelevant. However firms have to keep their price competitive in fear of potential entrants and existing competitors.

  1. Chinese car market overview. Citroen case study

    local conditions, Citroen brings to the commercial field knowledge which is invaluable to its joint-venture in both the development of the network and in promotion and publicity. Organisation We will develop and organise actively a complete sales network with : - Regional Offices, indispensable links in a country 20 times larger than France.

  2. Describe various methods that could be used to prepare a preliminary budget for a ...

    of estimating offers a level of accuracy that is directly related to the amount of time required to prepare the estimate, therefore it is important to select the correct method of estimating for the projected budget. The unit method is often used in early planning stages when little information is know about the program other than overall project parameters.

  1. Chinese economy sets for soft landing in 2005.

    months of the year, while money supply growth slid to 15.3 per cent in May from above 20 per cent earlier this year. But analysts have warned the investment and credit growth may rebound should the administrative tightening slacken, and have called for more market-oriented methods.

  2. The project objective is to investigate the practices of privatization in traditional market economies ...

    In addition, basic infrastructure must be developed because infrastructure is usually seen as a public good which few or no firm finds it beneficial to provide. 4.4 Singtel Singtel, before 1992, is government owned. It is a natural monopoly, whose services are most economical to be produced by 1 firm.

  1. This report will establish the opportunities and threats presented to Sony by the EU ...

    Markets and Prices: interactions of demand and supply determine the price of services and products. That is why in free markets you will find the price mechanism, this is because thee price system is an elaborate system of communication in which innumerable free choices are aggregated and balanced against each other.

  2. Transaction Cost Theory

    to particular transactions (for example skills in an employer-employee contract). Williamson shows that different combinations of these three elements give rise to different contractual models2 (Williamson, 1985, p.31). (This attention to contracts, both in terms of the relations within and between firms, has been a central feature of Williamson's work on transaction cost analysis.)

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work