Market Structure of Airlines including a Market Structure Table - Economics Essay Example
Each business that operates provides goods of some nature, public, private common resources, or natural monopoly - Market Structure of Airlines including a Market Structure Table introduction. To provide these goods to consumers and make money businesses are subject to Supply and Demand costs of labor as well as the Market Structure of its competition. Using knowledge in all of these aspects of economics it is apparent that Airlines are subject to these factors as well, how the economy works can be analyzed easier when taking a look at its components rather than the economy. Analyzing Market Structures by Types of Goods
One way of differentiating between market structures is to compare and contrast them; public goods, private goods, common resources, and natural monopolies are a good place to start. Public goods, private goods, common resources, and natural monopolies all provide some type of products or service to people. Private goods are both rival and excludable, which means that when an individual consumes a unit of a good another cannot consume it and that to consume the good it must be paid for. Private goods have similarities to common resources and natural monopolies.
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Private goods and common resources are both rival; and natural monopolies sell rival products. Public goods have similarities to common resources and natural monopolies as well because they are not excludable. For instance, drinking water that is not bottled is usually something one can obtain without payment. Although natural monopolies are mostly consist of private goods, a natural monopoly like Walmart provides drinking fountains just like community centers (public goods). Nature also provides common resources like a running stream for people to drink water without consumer’s payment.
The differences between these structures are more pronounced more than the similarities. Public goods and private goods are the opposite of one another. Private goods are rivalrous and excludable whereas public goods are non-rivalrous and non-excludable. A good example of a private good would be airlines. Once a person purchases a ticket in his or her name, it is his or her ticket; also a seat must be paid for to obtain it. One way to remember the differences between market structures is by noting that private goods and natural monopolies are most alike and public goods and common resources are ost alike. The Market Structure used by Airlines When flying to any destination in the United States travelers face prices established by an Oligopoly. The defining characteristics of Oligopolies discussed by R. Hubbard and A. O’Brien (2010) are a Market Structure where there is little competition between companies and the barriers of entry are low. Using the Market Structure Table (below) the characteristics of different Market Structures are apparent and it is observable how airlines stand.
It is apparent that there is a small number in which to buy tickets as the top nine airlines carry over 88% of the United States domestic passenger market share (Herbst, n. d. ). Few organizations holding such a high market share give them status as an oligopoly as well as the ability to limit competition creating a barrier of entry into the market itself. “The U. S. government removed restrictions on the nation’s airlines in the late 1970s, sparking wave after wave of new entrants and leading to dramatic declines in ticket prices.
But in recent years, a few major airlines, along with one former upstart, Southwest Airlines Inc. , have asserted control” (Zachary, 1999, para. 24). The government had removed a barrier of entry, which did permit more competition until the larger airlines gained enough market shares, in the end reaffirming the oligopoly market structure. When an organization is in an oligopoly the price changes of the competition affect each company in that market structure more drastically. Hubbard and O’Brien (2010) note how, “Fixed costs in the airlines industry are very large, and marginal costs are very small…
As a result, airlines often engage in last-minute price cutting to fill the remaining empty seats on a flight” (p. 440). These last-minute price changes and the standard prices of a single airline cause an increased number of seats filled on each flight, but the competing airlines will have less seats filled upon each plane and suffer a lower marginal revenue. Seeing how price changes affect each other in such an apparent manner it is often beneficial for companies in an oligopoly to form a cooperative equilibrium, in which companies work together to increase their mutual payoff (Hubbard & O’Brien, 2010).
Airlines have been known to compete with each other’s price changes lowering the potential marginal revenue that all of the airlines when a cooperative equilibrium would have given all of the airlines higher marginal revenue. In the airlines as with any business, the market structure dictates how they do business; each airline has few competitors and must find ways to conduct business where they can continue to bring in the highest marginal revenue. Labor Market Equilibrium affected by Demand and Supply of Labor Labor market equilibrium is affected by supply.
The equilibrium will change according to the number of workers who are able, willing, trained, and qualified to work in any given position. When there is a case of high demand and low supply companies will migrate to an area that suits what the business is looking for. If the supply is high and demand is low then those workers qualified and willing to work will move to where jobs are in high demand. Supply is made up of individuals willing and able to work in the labor market. The supply can increase if wages rise because more people will be attracted to the market.
The demand for labor is affected by costs, and by changes in the size of the company’s workforce. “The supply of labor, like the supply for other services, merely indicates how much labor workers are willing to offer at various prices. The supply curve for each worker will be different as each worker has different opportunity costs and preferences” (Lafaive, 2001, p. 1). The demand curve for labor will be different as each business faces labor substitutes, preferences, demand curves for products produced, and alternative employment for resources.
Factors that Affect the Labor Supply for Airlines Several factors affect airline labor supply and demand; one of the main ones is how much money a pilot makes per year were there are many misconceptions about this. Many people think that the pay for a pilot is much more than it is. Although the wages of pilots vary greatly, based on what type of classification they have (for example a pilot could be airline or military), the average salary per year of a normal airline pilot with years of experience under his or her belt is about 70,000/year (Demand Media Inc. 2010). Although this salary may not seem shabby for some, in today’s shaky economy this might not be enough to raise a large family or support a substantial mortgage on, keeping in mind however, that the more years of experience a pilot has, the more money they can make. This might discourage new pilots just starting out in the field. Another important factor that affects airline labor supply and demand is the rigorous schedule and workload of the pilots and how that may affect their families.
Pilots have very different schedules than that of a typical person because pilots and other airline workers have to be away from their families for a long period, which could have negative effects on their families. The time spent away from each other can be very difficult on the pilot and his family, bearing in mind that during special holidays and birthdays of family member’s the pilots and other airline workers may not be able to take time off. This could pose strain on some families and it takes a very special person to handle the schedule of a pilot.
The pilots must also deal with a quite heavy workload and it is very difficult for them to balance work life and home life at times. Airlines give pilots a great deal of responsibility and often when the general population hears about planes crashing the pilot bears the blame, which puts additional stress on them. In Conclusion, the Market Structure of Airlines Observing the different components that affect the airlines market structure can be very useful to see how they do business and what type of business that they do.
It is clear that the service provided to consumers is a private good as only one customer uses each ticket. Airlines also function as an oligopoly with only a few airlines in competition each constantly reviewing their pricing structure to be competitive and not face losing too much market equilibrium in the face of their marginal costs. Marginal costs including the availability of labor, which is controlled by several factors such as the pay available and the demanding schedules, makes each airline a highly competitive oligopoly.