Barriers to Entry
Barriers to Entry
Barriers for Entry and Exit into the Airline Industry
The airline industry is one of the most competitive industries across the globe. This is because of free entry, which allows any company to join the market and avoid a monopoly from the existing firms (Amacher & Pate, 2013). There are low barriers in this industry due to the removal of restrictions in different countries to allow free exchange and transportation of goods and products in different countries (Amacher & Pate, 2013). Barriers that may prevent entry into the industry include the high capital investment, which may involve aircraft acquirement and trained and experienced personnel, which may be costly to maintain (Amacher & Pate, 2013).
Different countries have removed tariffs and other restriction and barriers to enhance trade between the different countries. Due to this, the costs are fixed and firms can freely enter the market however due to this free entry of firms, there is stiff competition, which is a barrier for any new company intending to join the industry (Thielen, 2012). The market prices have already been established by the existing firms and due to the competitive nature of the firms, the prices may not be conducive for new firms. There are barriers involved in existing from the market due to the high capital investments and costs related to abandonment of the industry (Thielen, 2012). The airline industry is a unique industry, which deals with aircrafts, which cannot be used for other purposes. This makes it difficult for companies to exit the market resulting to price subsidization, which may lead to losses to the company (Thielen, 2012).
Explain How Each Barrier Can Foster either Monopoly or Oligopoly
The high capital investment is a barrier that can create oligopoly (Amacher & Pate, 2013). Not all firms can be able to raise the high capital investment considering the barriers related with the firm exiting the industry. This will result to a limited competition shared by a small number of firms (Amacher & Pate, 2013). This barrier can also foster monopoly as an existing firm has control over the market and pricing and few forms would compete with the existing firm. An already existing firm would have enough resources and experience and new firms would have a challenge competing with the firm in addition to the operating costs involved, which include personnel, which have to be paid regardless the firm’s income generation (Amacher ; Pate, 2013).
The firm has other costs, which may include costs of empty seats, which have to be covered by the firm, fuel, and loading and offloading costs. The barriers for exit, which include high costs involved with the abandonment of the industry, can create a monopoly market (Shimomura ; Thisse, 2012). Few firms would invest in an industry without a salvage plan if the firm opts to exit from the market. Most firms exit from the market due to low outcomes or high operation costs however, the airline industry has more costs involved with the abandonment making it a barrier for new companies to enter the industry which enables the existing firm to continue enjoying a monopolistic advantage (Shimomura ; Thisse, 2012).
What Barriers Give Rise to Monopoly That Will Allow the Government to Become Involved To Protect Consumers
The barriers for entry will give rise to monopoly allowing the government to get involved to protect consumers (Shimomura ; Thisse, 2012). These barriers will restrict new firms in entering the market due to the high costs of investments and existing firms may take advantage of consumers since they control the market and the pricing (Shimomura ; Thisse, 2012). Due to this, the government may get involved to protect new firms by giving them opportunities in the airline market against the existing airlines. The government may also support these firms by giving them capital to invest in the market which are strategies to protect the consumers from exploitation (Shimomura ; Thisse, 2012).
Amacher, R., ; Pate, J. (2013). Microeconomics principles and policies. San Diego, CA: Bridge point Education, Inc. Retrieved from https://content.ashford.edu.
Shimomura, K., ; Thisse, J. (2012). Competition among the big and the small. RAND Journal of Economics, 43(2), 329-347.
Thielen, B. (2012). Product differentiation and competitive pressure. Journal of Economics, 107(3), 257-266.