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According to the business Dictionary.com, a perfect competition market is a hypothetical (does not really exist in real life) free market with the following characteristics:
- the number of buyers and sellers is so large such that there is no single buyer or seller who can be able to determine or control the prices in the market.
- In the market, all the buyers and sellers main objective is to make the biggest profits.
- Entry and exit into the market for the buyers and sellers is not restricted in any way.
- There is freely available abundant information to all the buyers and sellers and sellers concerning the availability, costs and quality of the various goods and services on sale in the market.
- The goods or service which are in the market are substitutable due to the common characteristics that they have. (Business Dictionary.com)
In the united states, the airline industry may be described as such. This is due to the fact that there are billions people who travel annually and also numerous airlines. The United States is the biggest single market in the world and in 1996 it accounted for 41% of the total scheduled travels internationally (the Airline industry, 2000).
The pricing policy implemented by southwest airlines is one price fits all. For many years they have made the prices for their tickets to be uniform without any bias on basis of first, business or economy class as many airlines usually do. on top of this, the airlines has always kept its prices lower than the other airlines and this has helped it keep a large chunk of the air travel market with big profits yearly, but of late this has tended to change.(Reuters, 2008)
In mid this year, the oil prices had risen very high and in return had made the fuel prices to also rise. Since in the airline industry, the most used input is the jet fuel, it determines the prices of the tickets which the airlines can charge. With the increases in its price, many airlines had to also increase their prices.
Apart from the costs of inputs, that is the fuel, there area also some other factors which have affected and necessitated the increase in the prices of airline tickets. There are government regulations, for example at LaGuardia airport where the government intends to control the number of planes landing and taking off in a bid to control congestion (cheapflightss.com). The credit crisis in the united states has also contributed to affecting prices.
The input costs for the airlines industry mainly is fuel which is being concentrated on in this case. The cost of fuel is not necessarily affected by the market structure but there are a variety of factors which influence it. Some of these are: the cost of crude oil, the persistent increase in the demand for oil internationally, uncertainty of oil supply, taxation and also supply and demand imbalances.(caltex, 2006).
In a situation where the costs of fuel rises, Southwest airlines does not necessarily pass all of the increase in costs over to the consumers, their customers. This is unlike other airline companies whose prices are immediately affected by the increase in fuel prices. Southwest airlines has been able to hedge itself against fuel price increases by fuel hedging. This it did by locking in oil prices years in advance. (Denverpost.com).
Reference
Business Dictionary. Pure competition. Web.
Caltex. Determining fuel prices. 2006. Web.
Cheapflight.com. Southwest Airlines Wants LaGuardia Slots Potential Game-changer. Web.
Denverposst.com. Oil change may reverse fortune of Southwest Airlines. 2008. Web.
Reuters. Southwest Airlines Co (New York Stock Exchange). 2008. full description. Web.
The Airline Industry. Industry Overview. 2000. Web.
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