4/02/2005

Airline Increase

The three major airline companies raised their fares this last week by $10 because of the increased prices of jet fuel. The recent spike in fuel prices are blamed for bringing as many as three price increases to the airline industry in the last month alone. Most of the companies did not however, raise fares to destinations where smaller, more efficient airlines fly. Delta Inc. has been the leader in these fare increases, which makes one question the reality of the need to raise the prices. Delta has been on the verge of dying over the past few months, and maybe this is a plan to fight that. Is Delta the one setting the price, or is it the market?

4 comments:

Nick said...

I think that Delta is a major player in the airline market. So I think that you could say that the market and Delta are both setting the prices.

Harry said...

I would also agree that I think that Delta is a key player in the rising cost of tickets. The reason for this is because they have always been the big ones on top and have had most the power.

Keston said...

Maybe this is a price leadership situation where Delta is the leader and everyone else follows. But like we discussed in class, where does the leader come from and is Delta really the leader?

Dr. Tufte said...

This is why we spend two chapters on oligopoly. There are a number of ways we could look at this that are all plausible: 1) the firms are colluding, 2) it's a dominant stategy to raise your price when costs rise, 3) it's a Nash equilibrium to raise your price when costs rise, 4) that there is price leadership, and so on. On top of that, prices always rise when marginal costs do. All of them are reasonable explanations without more information about what the executives were thinking.