Microeconomic Theory course paper assignment - Essay Example

Response to Question Commercial Air Travel Market Prior to Frontier Airline’s Entry Frontier Airlines entered the commercial air travel market in 1994. Prior to that, the market was mainly dominated by full-service carriers. For some time, the industry was under the federal government’s regulation. That resulted in overreliance on the leading airline companies in the US. There was hardly any competition from smaller, low-cost airline companies. It is only after the deregulation of the industry in 1978 that more airlines started entering the market.

Due to the deregulation, low-cost carriers were free to enter the market, and they offered friendly services coupled with low fares. However, the already established airlines fought this entry as they claimed the demand could not sustain the supply of airline services (Calder 34). A simple fare structure helped the early low-cost companies gain some ground in the market. The fight back by the full service carriers involved market segmentation and price discrimination where different market segments paid different fares.

Prior to the entry of Frontier Airlines, low-cost carriers commanded a small portion of the market. Their combined market share in 1990 was about 7%. That had a big effect on the fare prices as the full-service carriers still dominated the market. However, the dynamics started changing in the mid-1990s when Frontier Airlines entered the market along with several other low-cost carriers. Response to Question 2 Effects of Entry by Low-Cost Airlines into the Commercial Air Transport Market Prior to the deregulation in 1978, there was limited entry into the commercial air transport market.

Low-cost airlines found it extremely difficult to operate as the established full-service airlines were protected by the system. There was very little competition from low cost carriers. However, with the deregulation, more firms started entering the market. To gain a share of the market, the new airlines had to offer better services at a lower cost (Calder 32). That increased competition in the industry and the full-service airlines had to react to counter such moves by new airlines. The continued growth of new carriers was a threat to existing carriers.

It reduced the market share enjoyed by existing airlines. That would have the effect of reducing revenue as the airlines would lose some business to the new airlines. As a counter measure, full-service carriers devised revenue management programmes whose objective was to maximize revenue from passengers. That was possible through price discrimination. The strategy was quite successful as it gave them some advantage in the price wars. The full-service carriers also increased their capacity with the entry of new airlines.

They also lowered their fares every time a low-cost carrier entered the market in the airports where they enjoyed dominance. However, the entry of low-cost airlines served to dilute the dominance of existing full-service airlines. For consumers, the entry of low-cost carriers in the market was very welcome. That is because it had the effect of bringing down air travel fare. It also meant better services as the new airlines were bent on offering quality services at low costs. That also forced other airlines to improve their services.

The increase in the number of airlines also meant the number of flights to different destinations increased. It eased air travel. A combination of low air fare, better service and increased flights led to a rise in demand for air transport as consumers responded to the entry of new airlines. Works Cited Calder, Simon. No Frills: The Truth Behind the Low Cost Revolution in the Skies. London: Virgin Books, 2008