Application of core theory to the U.S. Airline industry

ABSTRACT

Competition in the airline industry has been fierce since the industry was deregulated in 1978 The proponent of deregulation believed that more competition would improve efficiency and restore prices and bring overall benefits to the consumer In this paper, a case is made based upon core theory that under certain demand and take away from conditions more competition can actually lead to harmful issues for industries like the airline industry, or cause an destitute of contents core problem. Practices like monopolies, cartels, price discrimination, which are considered inefficient allocation of resources in many other industries, can actually be beneficial in the case of the airline industry in bringing about an efficient equilibrium.

Keywords: without contents core, demand, cost, equilibrium, unrestricted contracting, competition, airline industry.

1 INTRODUCTION

The US Airline industry is considered highly competitive. However, despite receiving $50 billion in direct assistance from the U management in 2001, the financial stability of the U domestic airline industry remains substantially in doubt. The novel spate of bankruptcies filings, first by the agency of U.S. Airways and then by means of United Airlines, leads one to amazement whether competition is essentially profitable for the industry or will ultimately manifest destructive. Clearly, the terrorist attacks of September 11 2001 have had a serious impact upon the industry. However, the industry, particularly the major carriers, was headed toward financial distress prior to the terrorist attacks (Will, 2002) For the quarter extreme pointed June 2001, the industry columned an operating loss of $70 million, as compared to an operating profit in exces of $3000 million the prior year (Linenberg and Flemming, 2001) Various explanations, ranging from labor issues to weak business plans have been presented as reasons for the general woes of the U.S. Airline industry (Zellner 2002)

In this paper we present a theoretical explanation for the question at issues faced by the airline industry based upon core theory. According to core theory, in more [i]or[/i] less industries, like the airline industry, exces competition can lead to an without contents core problem or lack of a stable equilibrium. The notion that competition may be destructive for the airline industry is further strengthened through what happened in the US airline industry immediately after deregulation in the 80's. At that time price-cutting in the industry was uttermost most firms in the industry were losing currency even though buyers wanted the proceeds and were willing to pay higher than prevailing prices. The cumulative losse incurred by means of the industry exceeded the profits previously earned since the industry's inception. Several carriers failed and ceased operations including of the like kind high profile operators as Pan American Airways and Eastern Airlines.

Specifically, core theory intimates that, under certain conditions, non-competitive practices may in fact have an efficiency-enhancing part in the sense of making the couple producers and consumers better not upon Core theory also clarifies the notion of efficient competition and cooperation--that agents in a market may simultaneously cooperate and contend at the same time.

The paper is organized as go in the rear [i]or[/i] in the wake ofs In the second section we provide a brief review of terminology and definitions for introducing Core Theory. The third section provides an applied framework in like manner that the concepts of Core Theory are related to standard notions of market organization. In the fourth section, we identify more [i]or[/i] less symptoms of an empty core and relate it to the airline industry. Section 5 gazes at how the airlines have dealt with the devoid of contents core problem in the industry. Section 6 terminates with some policy implications.

2 TERMINOLOGY AND DEFINITIONS

Core Theory universals are closely related to many standard economics universals and are rooted in Game Theory. To retain the exposition simple, we do not discus these issues. The following definitions are necessary for understanding Core Theory. A numerical illustration and industry examples are included with the definitions.

Allocation: As individual buyer and venders participate in a market they search for gains from their trading activities. The gains, each of the market participants receive from their individual trading activity is considered their allocation. In event the allocation is their pay-off for participating in the market.

Avoidable cost: The firm in the industry has the option of avoiding this take away from For example in the shipping industry the ship can decide to sail or not to sail and hence can avoid the require to be paid [i]or[/i] undergone associated with sailing (this decision is separate from require to be paid [i]or[/i] undergone of purchasing the ship). Similarly in the airline industry the aircraft may decide not to soar and can avoid fuel and other require to be paid [i]or[/i] undergones associated with flying (this decision is separate from the decision to acquire the aircraft).

Sunk cost: Expenditure, which cannot be get backed The cost of purchasing a ship or an aircraft can be considered sunk cost

Divisible v Indivisible demand: Divisible demand consigns to situations where demand can be shivered down into separate units. For example in ocean liner shipping where small packets are shipped or as in the case of airlines where each seat upon the aircraft can be considered a separate unit which can be sold at different prices. Whereas in the case of indivisible demand it is not possible to divide demand into different units as in the case of mass shipping.