To what extent will a high degree of competition in a market result in lower prices for consumers?The focal point of this assignment is to understand to what extent will high degree of competition in a market leads to lower prices for consumers. For the purpose of this argument I will be looking into the leisure industry, focusing upon the airline travel industry. There are other factors which will be considered which play a vital role in understanding, the extent to which consumers will benefit such as, price elasticity, income elasticity and the supply and demand of a product within the airlines.
High degree of competition benefits the consumer in many ways which this assignment will discuss with further research and academic research. I will investigate how the demand of consumers affect price but also helps generate greater competition among sellers which therefore results in a lower product market price. This essay will continue to remind the reader, the extent to which all these factors aid in lower prices for the consumers, by using examples from the above industry.
Airline industry provides us with transportation to our desired destinations around the world. The airline industry is oligopolistic, where the market is concentrated with a few firms and they are all independent however, in some terms, it is also a monopolistic industry. The airline tickets are concurrently determined by supply and demand. Demand is the amount of goods and service a consumer desires to purchase at a desired price, whereas supply is the amount of goods and service producers wish to produce at a desired price (Investopedia, 2019). Supply and demand play a vital role in the competition in the airline industry as they help to determine the pricing of the passenger’s seats. Also, how this will affect the market condition and the consumers.Elasticity is the degree of sensitivity or responsiveness of quantity demanded, is to a change in price of a product. There are different types of elasticity of demand and supply for example price and income elasticity of demand and supply which play a major role in the price reduction for passengers. Price elasticity of demand calculates how much the quantity of demand of an airline ticket will respond to the change in price of the same airline ticket. The law of price elasticity states that the higher the price of a product the lower the demand when all other factors remain the same. Price elasticity is calculated as the percentage of change in quantity demanded divided by the percentage of change in its price. Depending on prices the demand can be elastic or in elastic. Which is why percentages are used as they help to see a clear comparison of the changes in demand and prices. If the percentage of demand is less than the percentage rise in price, then the amount spent on airline ticket will decrease and the demand is said to be elastic. However, is the price rise causes a smaller percentage reduction in the quantity demanded and price elasticity will be less than this, then demand is said to be “inelastic” (Papers.tinbergen.nl, 2019). Price elasticity depends largely on the consumers who are travelling. The airline industry has two types of passengers; leisure passengers and businessmen. Leisure passengers have an elastic demand as the demand is much higher when the prices are much lower. These passengers are aware of the time periods of their holiday so know when to book but value price over time periods. On the other hand, businessmen have an inelastic demand, the quantity does not change based on the price variation. Businessmen do not look for cheap flights to travel, they book a flight for business purposes, so they look for the dates and times they wish to travel, not taking price into consideration as they want a guaranteed flight at their selected times. This indicates that the airline industry is extremely price elastic, Small shifts in prices have a dramatic effect on the consumers. Therefore, airlines have segmented their passengers on the flight. Due to new technology and reservation systems airlines are able to predict the willingness a passenger is prepared to pay for their flight. Which means the airlines then adjust the prices of the seats according to the type of passenger travelling. Resulting in lower price elasticity passengers paying higher prices to those with higher price elasticity. Which is the most efficient way to maximising profit margins and revenue (Economicshelp.org, 2019). Since deregulation in the airline industry it has made more cut throat competition within the industry as it has allowed smaller airlines to enter the market. Smaller, low cost airlines such as Ryan Air and Easy jet have increased competition for other airlines as they have forced ticket prices to stay low. Hence, the bigger airlines are not able to price discrimination as the smaller airlines offer lower prices and different routes compared to bigger companies. However, major airlines have a monopolistic approach to the geographical routes their aircrafts take. Low-cost airlines fly a limited number of routes and earn less revenue. Major airlines monopolize routes they fly to and from a city, by concentrating their flights from large cities to surrounding cities. This is known as the hub and speak system (Kons, 2019). This does not allow low-cost airlines to use these routes which prevents competition, but low-cost airlines find alternative routes equally as successful as major airlines. Despite not having the desired route, low-cost airlines offer more flights from that route in attempt to gain more passengers. This fulfils the demands of the passengers so that they can fly at a desired time without being charged extra for it. The speed, comfort, and safety aspects of the journey are more likely to be much the same, whichever airline a passenger selects (O’Conner, 2001 p.5). O’Conner suggests that passengers do not value comfort or extra leg room when travelling, they prefer to buy a low-price ticket. This demonstrates the immense amount of competition that there is within the airline industry and how low-cost airline are competing with major airlines bumping down the prices significantly, benefitting the consumers.Income elasticity of demand measures the degree of sensitivity of demand changes in a buyer’s income. This can be defined as the ratio of the change in quantity demand over the change in income. The higher the income elasticity, the higher sensitivity for demand is for airline tickets to changes in income. This suggests that high income elasticity of demand proposes that the consumers income has gone up and they are more likely to purchase an airline ticket. Same applied to when a consumer’s income goes down, the consumer will cut back on such purchases of the airline ticket Deakin.edu.au, 2019). Low price elasticity implies that changes in a consumer’s income will have little effect on the demand. There are different types of income elasticity, as airline travel falls under luxury good, the consumers with higher income are less sensitive to prices of airline tickets indicating they are more willing to pay, increasing demand. However, consumers with low income are more sensitive to the prices as they are not as willing to pay, and the demand reduces. This implies that airline tickets are relatively elastic and that the consumers demand is more responsive to the change in income. However, elasticity is heavily dependent on other factors which also determine the demand in the airline industry.These factors play a vital role in deciding the elasticity of the airline industry like any other industry. These factors affect the willingness to purchase an airline ticket. Factors such as income, price of the seat and the number of buyers and who the buyers are, are factors taken into account for the demands of elasticity. Production of product, weather conditions and timings of the flight are factors taken into account for the supply of elasticity. Determinants by these factors and more which depends upon current market conditions make the industry unstable. Income is a major factor on the demand curve, when a countries economy strives so does an individual’s income and disposable money. In this context if an individual’s income increases then his demand for a flight ticket will increase. On the demand curve if the demand has increased then the curve would move to the right, increasing prices, and the quantity of seats being sold (Uea.ac.uk, 2019). Whereas, If the economy was low and an individual did not earn well then, the demand curve would move to the left, decreasing prices, and the quantity of seats sold. Second determinant is the price of the tickets, price of oil has a direct influence on the demand of air ticket. When the price of oil increases, the airline industry had to increase its prices of tickets to maintain its revenue. Hence, the fuel price and the demand for tickets have a direct correlation, where increase of oil decreases the demand of air tickets. Lastly the number of people buying the tickets, when prices are reduced by the airlines, more buyers purchase an airline ticket. This is because the tickets are set at lower prices to attract customers, especially during quieter times during the year. Thus, creating demand for the air tickets, benefiting the consumers and the industry. As they industry gain more profits and keeping revenues up despite selling at a lower price and consumers receive lower prices and a chance to buy an air ticket at an unexpected price.The law of supply curve is that it slopes upward so that any chance in price is simply movement along the supply curve. Factors such as price of production is a factor dependent on the airline supplier. When the cost of producing a certain good increase, the supply will decrease which causes a shift to the left in the supply curve. In the airline industry the price of fuel is also a major factor for affecting the supply of elasticity. If the price of fuel increases then the number of flights per day will decrease and no longer be supplied, reducing costs for the airlines making sure they keep good revenue by cutting out the flights which are not profitable. Another factor is technology, technology plays a major role in the airline industry and competition. Major airlines are using advanced technology to be able to predict the customers that travel with their airline in order to work out how to price their tickets. Also, airlines are trying to use technology to find ways to conserve fuel. This would profit the airlines are they would be able to provide more flights for the same amount of fuel consumption. This would lead to higher levels of competition between the airlines in the market as more flights will result to airlines meeting a higher demand during peak season, ultimately profiting both airline and consumers as prices would reduce dramatically. As well as airlines charging higher prices closer to the dates maximising profits. Lastly weather is a key factor, proving to be a big issue. Bad weather can cause delays and cancellations leading to loss. Hence, airlines are using technology to ensure the safety of their passengers and aircrafts during winter seasons. In conclusion, elasticity of demand has allowed us to understand the level of customers sensitivity when price of a product changes over a period of time and how the demand shifts. This has allowed us to take into consideration the supply and demand factors to predict consumer behaviour and prices of the air tickets. I believe that the consumers and airlines are both profiting to a certain extent. Consumers are able to search for cheaper fares with multiple airlines creating much more competition for major airlines to keep loyal customers. Competition between airlines has led to airline adopting strategies which involve price discrimination in order to keep revenue and profit up. Therefore, I feel as if the airline industry is impacted mostly by what time of the year it is. As off peak and peak season create the most shifts in demand profiting the consumers the most.