Despite the formally limitless possibilities of information technologies for the development of small firms, despite the formation of numerous virtual and network structures, the latter are usually inferior to large manufacturers. The inefficiency of the economy of individuals is no longer in doubt, and its prosperity contradicts scientific, technical, and economic progress. Thus, among the trends of the information economy, the processes of centralization and concentration of capital, consolidation of economic units, oligopolization and monopolization, and the formation of TNCs, characteristic of the industrial stage, are preserved. The US airline sector is likely to be affected by the mentioned trends – especially by oligopoly.
Essence of Oligopoly
Today, the real driver of innovation and economic development is the monopoly of large firms and not the competition of small and medium-sized producers. The processes of property redistribution have entered a new stage – the stage of active oligopolization, which is manifested in voluntary and involuntary mergers and acquisitions of firms. The modern stage of progress objectively increases the scale of firms (Ganapati, 2021). Small and medium-sized production in many industries objectively cannot be a solid foundation of the economy, as it does not provide the proper economic effect and safety margin in a crisis. Oligopolies are firmly gaining positions in both national and global markets.
At present, the concentration of production has exceeded sectoral and regional boundaries; production volumes and financial resources are concentrated in the hands of a smaller number of oligopolies. On a global scale, an oligopoly is often formed, within which no more than five producers compete. For example, at the end of the 20th century, three of the 20 largest global companies provided about 40% of all oil refining, production of 60% of cars and synthetic rubber, 60% of tobacco products, and 70% of packaging materials (Ganapati, 2021). A similar situation is observed in aircraft construction, the automobile industry, and the field of ICT.
The growth of intra-company hierarchies and oligopolization of the economy is possible both through horizontal and vertical integration. The transition to a horizontal management structure allows companies to adapt to growing uncertainty, to achieve greater flexibility in responding to changes in market needs. From the point of view of information, distortions and overgeneralization of information are overcome when transferring it from lower to higher levels.
Oligopoly can be seen as a good vehicle for stimulating technical change, as it is provided to finance technical developments. Its ability to influence price ensures that development costs are recouped and that future revenue is not captured by imitators. In this case, market power protects the incentive for technical development. After all, innovations require time and do not bring immediate income after a certain time between the period of “maturation” of the innovation and its exploitation.
At the same time, the impact of oligopoly on innovative development is ambiguous. The oligopolists turned copyright income into an additional tax on society, increasing the price of products ten times over the cost price. The policy of oligopolists assumes that the consumer must constantly update the technical and software base. The goods themselves are often designed to last less and be replaced more often, ensuring uninterrupted demand. There are often cases when it is oligopolies that deliberately deprive a product of its valuable qualities in order to force the consumer to buy other products.
Oligopoly and the US Airline Industry
Apparently, an oligopoly exists now in the US airline sector. As explored above, an oligopoly develops when a few businesses control the majority of a market, frequently as a result of high entry barriers that deter other businesses from entering. High launch costs, infrastructural limitations that limit the frequency of departure and arrival slots, and industry leaders’ significant economies of scale are some of the entry hurdles in the US airline business. While four United States carriers collectively control about two-thirds of the national market, no airline has a market share of more than 20%. Nevertheless, some have a bigger market share at specific locations or on specific routes.
Nearly 67% of the national US market share was held by four airline companies as of 2022: American Airlines, Delta Air Lines, Southwest Airlines, as well as United Airlines Holdings. Depending on internal commercial passenger miles during the past 12 months, American Airlines seemed to have the highest market share, with 18.3%. United had 14.3%, closely followed by Southwest and Delta. It should also be stressed that Frontier Group Holdings announced intentions for a $6.6 billion purchase of Spirit Airlines on February 7, 2022. In the twelve months beginning in May 2022, the merger would establish the fifth-largest US airline, with a joint national market presence of 7.9% (Frontier, 2022). Due to the COVID-19 pandemic-related travel restrictions, air travel significantly decreased in 2020. After taxes, US airlines together lost $35 billion during that time. The second quarter of 2021 saw the national airline sector back to profitability, while the third quarter of that year saw a total end profit of $2.7 billion.
The sector continues to come under fire from certain politicians and customers for suspected anti-competitive actions. Consumers are stuck in a non-competitive sector with a record of collusive activity, paying exorbitant prices. Similar worries led the Justice Department’s antitrust division to open an investigation into the aviation sector in 2015 (Kendall & Carey, 2017). That investigation did not yield enough data to support a legal claim.
Then, the Northeast Alliance code-share agreement, announced in February 2021 by American Airlines and JetBlue, allows for cooperative flight marketing, operational coordination, and reciprocity incentives for each other ‘s brand loyalty policies. The Northeast Alliance merger was challenged in court in September 2021 on the basis that it violates antitrust laws and hurts aviation travelers worldwide, and removes competition at the airports of Boston and New York (Wolfsteller, 2021). These companies have increased their collaboration under the partnership over the last year despite the ongoing lawsuit. The airlines have requested that the government’s lawsuit be dismissed by the US court.
The majority of national passenger travel is handled by a small number of American airlines, yet no one airline has a market share of full dominance, which is inherent to oligopoly. Specific carriers do operate a significant portion of the flights from particular airports, and there may also be little rivalry on particular routes. Because the airline business was liberated in 1978 and since 2013, as a result of a series of airline mergers, airfares have generally decreased despite significant entry hurdles and repeated accusations of conspiracy from detractors.
It should also be stressed that the US airline sector is the one that most frequently employs third-degree pricing discrimination. Airlines categorize customers into distinct categories according to a set of traits and impose higher pricing on those whose demand is the most inelastic. Making the differentiation between time-sensitive (mostly business travelers) and non-time-sensitive (primarily leisure travelers) travelers, as well as between juncture and connecting commuters, is a common example.
Time-conscious travelers typically prefer quicker interconnections and place a high value on airline on-time performance and regularity of service. They often do not make advanced flight reservations. In the case of last-minute modifications to their travel itinerary, their tickets must be convertible from one airline to another. These travelers frequently purchase more expensive, less-restricted tickets because their tickets are typically compensated for by their employers. Contrarily, non-time-sensitive travelers are interested in finding the best deals and are prepared to put up with lengthier travel durations and more limitations on how they may use their tickets, such as limitations on route, date, flight changes, etc. Business travelers may often be distinguished by their incapacity to make reservations beforehand and by purchasing tickets with fewer limitations.
References
Frontier. (2022). Frontier Airlines and Spirit Airlines to combine, creating America’s most competitive ultra-low fare airline. Web.
Ganapati, S. (2021). Growing oligopolies, prices, output, and productivity. American Economic Journal: Microeconomics, 13(3), 309–327.
Kendall, B., & Carey, S. (2017). Obama antitrust enforcers won’t bring action in airline probe. The Wall Street Journal. Web.
Wolfsteller, P. (2021). JetBlue and American forge ahead with alliance despite lawsuit. Flight Global. Web.