PRICE COMPETITION IN CHINESE AIRLINE INDUSTRY

Price Competition in Chinese Airline Industry

Price Competition

Introduction

"Competition is a good thing; monopoly is not a good thing." This statement is generally not one hundred percent true for a market economy. The ideal competitive market economy in which supply and demand is in equilibrium and where consumer and companies have a benefit is not available often.

J.J. Laffont mentioned on the Annual World Bank conference 1998: "Competition is an unambiguously good thing in the first-best world of economists." Laffont assumes for this ideal world "a large numbers of participants in all markets, no public goods, no externalities, no information asymmetries, no natural monopolies, complete markets, fully rational economic agents, a benevolent court system to enforce contracts, and a benevolent government providing lump sum transfers to achieve any desirable redistribution." But this ideal world is not always the case. The result is that not all countries can deal with competition. Different forms like monopolies can be the better choice in different situations.

"Competition is a natural outgrowth of scarcity and the desire of human beings to improve their conditions." The consumer in this economy has the advantage of lower price levels in a perfect competitive market compared to for example a monopoly. Consumer can get goods and services to a lower price.

But there are also disadvantages. Companies are not able to earn the consumer surplus from each customer and have not as high revenues like in a monopoly. If the profit is too low the number of companies which act in these markets will decrease and fewer companies will invest in these markets. The overall effect is an increase of the price level and a decrease in economic growth in these markets.

Analysis with Examples

In the European Union is Mario Monti responsible to establish and implement a coherent competition policy. To avoid too much competition, decreasing investments and higher unemployment rate Monti uses again a "Gruppenfreistellungsverordnung" (GVO) for Germany which allow car manufactures in the automotive industry to define the dealers in the value chain. The result is a closed market for car dealers which permit regulating the supply, demand and price level. Without this regulation the price level of cars and the profit for the manufactures will decrease. The consequence could be less supply, less investments and a higher unemployed rate in a bad market.

The following potential gains from increased market competition can be defined:

1. Lower prices for consumers

2. A greater discipline on producers/suppliers to keep their costs down

3. Improvements in technology - with positive effects on production methods and costs

4. A greater variety of products (giving more choice)

5. A faster pace of invention and innovation

6. Improvements to the quality of service for consumers

7.Better information for consumers allowing people to make more informed choices

Are monopolists bad?

At the end of the competitive spectrum is the monopoly. The monopolist is known as a price maker who can set prices at any desired level. Monopolies occur largely due to the existence of entry barriers. These barriers include:

*Legal Barriers (patents and licenses)

*Economic Barriers

*Natural Barriers

With ...