Indian Airlines Market System- Oligopoly

Introduction

The Airlines in India, especially with respect to passenger airlines strictly follows a oligopoly type
structure with characteristics as follows

(1) An industry dominated by small number of large firms as shown in fig.1 below.

(2) Firms sell either same or differentiated products by increasing the comforts in the flight
like

good service quality.

(3) The industry has huge barriers to entry (both with respect to regulations and the initial
investment required)

Characteristics of Indian Airlines

Few number of forms contributing to majority of the market share

Products are differentiated in terms of service, quality and offerings

Marginal Revenue = Marginal Cost

Firm is a price setter

Price > Marginal Cost

Entry barriers

Market Share Concentration

According to figures on market share of various scheduled airlines in same year Indigo topped
the list with 39.6% in 2016-17, followed by 18.1%. Air India, SpiceJet, Go Air are following them. These
statistics show that not more than 5 to 6 companies are contributing to the whole airline service in India.
 Fig.1, Shares of major Indian Airlines illustrating the oligopoly.

Differentiated Products

Fundamentally all airlines sell the same service, that is transportation. But every firm tries to
differentiate its product as the unique among all. They do this by introducing good facilities like providing
meals, T.V, large legroom, etc.,

Marginal Revenue and Marginal Cost Effect

The airline companies achieve profit maximization by managing their marginal revenue to be
equal to the marginal cost. If the marginal revenue is greater than the marginal cost then the airlines can
increase the ticket cost. If the marginal revenue is less than the marginal cost then the airlines should
decrease the ticket cost accordingly. So higher profits are obtained when the marginal cost is equal to
the marginal revenue.
Firms control over the price

Each seller in an imperfectly competitive market faces a negatively sloped demand curve for his
product permitting him some control over the ticket cost. In oligopoly a few firms produce the same
product, while in monopolistic competition many companies produce differentiated but similar products.

In a differentiated oligopoly a few firms produce products different enough for each firm to have its
downward sloping demand curve. The firm finds the price It will charge the passengers at the profit
maximizing level of output from the demand curve. So the companies have a large control over the ticket
prices.

Entry Barriers

The mortality rate in the airline business is very high. Thats equally true for any low-cost airline
model. It requires adequate staying power to buy an aircraft and take losses in the initial years.

Entry costs are not recoverable and incumbents have the ability to respond quickly to entry of a
new competitor. Capacity constraints, absence of freedom to compete on the route, investment
constraints, and restrictions on code sharing can all be independent barriers of entry.

Conclusion
According to the above characteristics the Indian airlines is more like oligopolistic market system.

References

Profit maximization by downward sloping of demand curve

{http://www2.york.psu.edu/~dxl31/econ14/lecture22.html}

Marginal revenue { https://en.wikipedia.org/wiki/Marginal_revenue}

Major airlines in India {https://en.wikipedia.org/wiki/List_of_airlines_of_India}