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Chapter 14: Problem 5

An article in Forbes described these characteristics of the airline industry: "Airlines aren't like normal consumer businesses.... Infrastructure including aircraft, gates and runways takes years to put in place. Capacity rebalancing in response to demand shifts isn't easy and idle infrastructure of this magnitude is very expensive." Do the characteristics referred to in the article help explain why the airline industry is an oligopoly? Briefly explain.

Short Answer

Expert verified
Yes, the characteristics referred to in the article do help explain why the airline industry is an oligopoly. That's because the airline industry is characterized by substantial barriers to entry (like the need for expensive infrastructure including aircraft, gates, and runways), and limited competition among a few dominant firms. These traits align with the definition of an oligopoly.

Step by step solution

01

Understanding Oligopoly

Oligopoly is an economic term which refers to a market condition in which there are few sellers. This happens because the suppliers deliberately maintain the level of goods they supply to keep the prices high. Due to this reason, each supplier in the oligopoly is able to influence the prices of goods and services.
02

Interpreting the information from Forbes Article

The given extract from the Forbes article tells that the structure of the airline industry includes high costs infrastructure like aircraft, gates, and runways, which take years to establish. This, in turn, reduces the ability of new firms to enter the market, affirming the characteristic of an oligopoly.
03

Linking of article reference to the Oligopoly

If new airlines want to enter the industry, they'd need to invest in expensive infrastructure. Thus, this characteristic helps explain why the airline industry is an oligopoly. The few existing airlines maintain their position in the market because the barriers to entry are high due to the infrastructure costs. Besides the infrastructural barriers, airlines also have control over prices, routes and schedules, which again is a feature of oligopolistic markets.

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