Microeconomic Assignment | The cost of Competition | Case Analysis |

Justine Liu
MBA Candidate at TiasNimbas Business School |

* Explain how between January and September 1997 the game changed compared to that which had existed prior to January 1997.

Prior to January 1997, there were only two big players in the market of flights between Turin in Italy and Innsbruck in Austria. These two players are Air Turin and Innsbruck Air. Thus we can conclude this market was a duopoly one.
There were some features in this market. First, they provided differentiated services. Air Turin flied twice-daily whereas Innsbruck Air flied once a day. And their flight schedules were never the same. Second, they avoided conflicts with each other intelligently. Air Turin did not provide Sunday services, whereas Innsbruck Air did not provide Saturday services. Third, the pricing strategies they used were similar. As table shown the fare structure all in the same currency, we can find that there was no large differences between their price. Also, they even use the same price differentiation segmentations for customer with higher or lower price elasticity. Forth, they share almost half the market. In year, 1996, Air Turin achieved an average load factor of 65 per cent, and Innsbruck Air achieved 68 per cent. The market shares for Air Turin and Innsbruck Air, recorded at December 1996 on the Innsbruck-Turin route, were 58 per cent and 42 per cent respectively.

There is interesting information in this case “Under the prevailing bilateral agreement the two airlines had carefully managed the total supply of ‘seats’ and ensured that their respective flights were spread out during the day.” So we can know there must be some “rules” between two players. We cannot learn from the case that there was a cartel agreement, so we can assume this market was reaching a equilibrium