The Structure of Airline Market in the United States: The of AMR Corporation - Case Study Example

United States v. AMR Corporation Introduction Firms do involve in various activities in the process to achieve their goals and objectives. They are either in production, manufacturing or process industry. Hence in the process of producing or establishing themselves in a specific area as they process their goods and services, behave in such as to maximize their profits especially if they are few as in oligopoly situation. They might merge to be dominant or collude to maximize their payoffs against rivals (Vives, 2001).This actions negatively affects consumers as they will be misused and thus must be protected by the government. Through merging of the airlines, it will be unhealthy for the American population as this would lock out the small airlines out of the business leading to consumer exploitation hence providing a wary to the government. Collusion of the big firms were predicted to lower prices that would ensure small firms are kicked out of the market making them monopoly. Due to the demand of the service by the public, consumers stand a chance to be exploited by the airline operator. The company and its affiliates are considered to collude in the operations of the airline limiting the number of firms in the market that would have resulted into monopoly. The government argues that .through this behavior, consumers will be forced to pay additional prices so as to secure the services which will make the market to be extremely expensive as the supply will be reduced as demand rises translating to high prices. Hence the industry services will act as detrimental to economic growth and actions must be taken. A graph showing a decrease in supply of airline industry with an increasing demand Price reduction of supply P1 Po increase in demand Supply Demand Q1 Qo quantity From the graph above, if firms produce in self-interest, they will do so as if they are in a competitive market and will follow an equilibrium price of P1 and equilibrium quantity Qo. Since the prices are determined by market they are socially optimal ensuring maximum consumption. If the government don’t act, then the firms will collude and form a dominant firm in the industry reducing the number of airlines consequently reducing supply against a steady demand. This will lead to increase in prices as shown by movement from Po to P1 while units will reduce from Qo to Q1. This prices and quantities are not socially optimal and will exploit consumers since supply is directly related to demand and will hurt the economy should the court have allowed collusion to go through. The court on the other hand had a case against AMR and its affiliates on the nature of the business they were planning to engage in against the consumer interest of the United States of America. They argued that there would be less airline and fewer routes limiting consumer choice as there would be too much concentration translating to high prices. Hence there is need to protect the consumers and hence there is justification in cancelling the deal. The airlines dominates the market and there is fair competition between them. Colluding will mean the company’s will act as if they operate in a monopoly market. Firms that operate under this market structures are only profit oriented and would otherwise exploit consumers since they do not operate in an allocative efficiency but only consider productive efficiency as shown in the graph below Price, cost revenue MC P ATC Market demand Q MR Quantity By the firms colluding they will behave as in monopoly as they will dominate the market. They will charge prices where MR=MC which will lead to inefficiency since if MR is below the ATC they will incur loss due to high operating costs. But if the firms operates in non-corporation, they will do so as in a competitive market and will charge price equals to MC which is an allocative point, hence by the airlines emerging consumers will suffer as prices would rise due to lack of competition as the corporation’s profit increases. The emerging of the airline will make them operate in a market where they will make them become the dominant firm in the market. They would make strategies that gives them the maximum payoffs no matter which strategy they play. They would decide on both the equilibrium output and prices of the market that would negatively affect the small firms. Small firms would then be either forced out of the market or adopt strategies according to the leaders decisions making lose. Hence to prevent the consumers from exploitation and to bring a fair competition in the market, the government must come in with strict rules by promoting competition so that they operate in an allocative efficiency to enhance optimum social operation. The case thus tries to prevent such actions of inefficiency as a result of the dominant firm which will operate as a monopoly to create favorable environment and ensuring consumer satisfaction as transport plays a very important role in the economic development in the United States. The market structure usually involves few firms that compete in both prices and outputs. By colluding or merging makes them market leader and are capable to influence prices and output as they would command a large share of the market. They may decide to fix a constant price that dominates the industry or produce in large amounts limiting the output of their rivals. The merging firms would produce and sells where MR=MC. This makes their prices relatively high which are not socially optimal making consumers to suffer in the process by paying higher prices. Hence there is need to protect the common consumer and state comes in through the court to prevent such collusion from happening and promote competition by encouraging the firms to operate independently as prices will be determine by markets which are socially optimal to the public. The case is otherwise justified to nullify such a corporation in the best interest of the citizens. Airline industry comprise of few firms and due to its nature the government must protect the industry so as to prevent it from actions of monopoly. By the big firms coming together, the small firms will operate in isolation and make choices as determined by the emerging firms. Many firms will be also be locked out of the industry as the sunk costs will be extremely high making the industry unprofitable. This is an industry which competition should be encouraged so that production efficiency is achieved. Thus the government through the court are forced to act to provide the necessary conditions for business operations so that entry and exit is at ease to any investor since if the court allows the collusion to be successful, the sunk costs will be to high preventing entrants into the market that would otherwise provide competition to the existing firms so as to reduce the market prices and improves efficiency. Conclusion Market structure plays a key role in the consumption levels of consumers since they determine prices and outputs of firm (Carl, 2012) As a result they may create inefficiencies so as to advantage themselves by either controlling production or setting prices that maximizes their profits especially if the firms are few in the market as in the case of oligopoly or act as monopoly. Due to stiff competitions firms behave in a manner to benefit themselves and cautious on what others do or strategy they employ in making their output and price decisions. They can collude as in the case above leading to inefficiencies hence market failures. This may be inform of increased prices, reduced output whichever the strategy that leads to maximum payoffs. The state thus comes in to protect the interests of the consumers since if the market is left to be determined by the players it would be to maximize profits and not consumer satisfaction. The government can set market prices in this case so that industry players only decides on the levels output. This action would promote competition in the market leading of provision of quality products in the market. Moreover prices will be socially optima’s hence consumer satisfaction as there would be no exploitation (Stroux, 2004). Thus in declining for merger of the big airlines, they act in good faith as this would have constituted monopoly making the market to be inefficient in provision of the airline service. References Baye, M. R. (2000). Oligopoly. Stamford, Conn.: JAI Press. Durlauf, S. N. (2010). Game theory. Basingstoke: Palgrave Macmillan. Buchanan, P., & Randall, R. (1998). The monopoly. St. Louis: Concordia. Carl, S. (2012). Market Structure. Delhi: Orange Apple. Heijman, W. (2007). Regional externalities. Berlin: Springer. VIVES, X. (2001). Oligopoly pricing: old ideas and new tools. Cambridge, Mass. [u.a.], MIT Press. STROUX, S. (2004). US and EC oligopoly control. The Hague, Kluwer Law Internat. HELPMAN, E., & KRUGMAN, P. R. (1989). Trade policy and market structure. Cambridge, Mass, MIT Press. NORMAN, G., THISSE, J. F., & PHLIPS, L. (2000). Market structure and competition policy game-theoretic approaches. Cambridge [etc.], Cambridge University Press. CAMERER, C. F. (2011). 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