MICROECONOMICS presentation - Essay Example

Barriers to Entry. The airline industry operates in a highly dynamic environment and is affected not only by the legal, technological and economic environment but also by the global environment. Government restrictions and high degree of competition act as entry barriers in the airline industry. However the biggest entry barrier is the gargantuan cost involved in setting up and running the business. The acquisition of aircrafts, implementation of adequate security measures, deployment of skilled manpower and rendering the desired level of customer service entail huge financial resources.

The high cost of entry however does not deter organizations with sound business models and adequate financial resources to enter the business. The Australian domestic airline industry, after its deregulation in 1990, has seen the entry of many players each catering to different customer segments. There have been firms that have flourished (Virgin Australian Airlines) and there have been firms that have perished (Ansett Australia). Competitive strategies. In addition to the general business environment, companies are also affected by the competitive strategies adopted by rival firms. . An example of the differentiation could be an airline (Qantas) which provides ‘bells and whistles’ in its service and charges a high price.

Likewise, there could be another airline (Tiger Airways) with a ‘no frills’ service. It is important to note here that these two airlines are targeting distinct customer segments. As such, the high price charged by the airline offering value added services (e.g. in-flight entertainment, free wine) in addition to the core service of transportation does not induce the other airline, which offers ‘trimmed down’ services, to increase the price. Game Theory. There may be instances where more than one firm is competing for the same target market; for e.g. two airlines (Jetstar and Tiger Airways) trying to capture the price-sensitive customer.

The competitive strategies employed by one firm and reactions thereof by the other firm are best understood with the help of the game theory. In the world of business game theory finds applications in research and development expenditure, pricing, new product introduction, strikes, negotiations etc. A manager’s decision in each of these settings depends on the decisions that other players in the industry will take. As such, the payoffs in these setting can said to be interdependent. In the discussion about the airline industry, one may fathom three different outcomes; co-operative game, non co-operative game and a situation of no interdependence.

The airline may get together and form a cartel (cooperative game) and operate as if they were a monopoly. In such a case the dominant strategy of each firm would be high price and neither would be compelled to reduce the price because of the implicit co-operation. This is the most logical game when the industry