Question

Select an industry or firm. State its market structure (pure competition, monopoly, monopolistic, or oligopoly). Next, please define the characteristics of the industry or firm that support your selection of market structure. Lastly, describe and illustrate graphically the firm's profit maximizing behavior in particular MR=MC under the above-mentioned market structures or conditions.

Answer 1

Industry or firm

Industry –Airline industry.

Market structure      

Oligopoly market structure.

Characteristics of the airline industrythat support my selection of market structure

Small Number of Large Firms: the airline industry is dominated a small number of firms that are large in size. Each of the firms in the industry is relatively big compared to the overall market size. This feature gives each and every of the relatively large firms in the industry substantial market control. The airline industry in the US for instance, mergers among airlines have left the industry dominated by four main entities, United Airlines, Delta Air Lines, Southwest Airlines and American Airlines. These firms are few in number but large in size.

Identical or Differentiate Products: the airline industry offers both identical and differentiated products and services. Identical products and services occurs in the form of both business and economy classes in the passenger planes. Differentiated products and services occurs in form of in-flight entertainment and nourishment to the passengers. This is the only way firms in the airline industry can compete.

Barriers to Entry: firms in the airline industry attain and retain market control via barriers of entry. The main barrier to entry in the airline industry is the high startup cost. For someone to operate an airline, he/she requires a lot of start capital. This requirement acts as a barrier to other firms to enter and thus only few large firms only exist in the industry. This barrier to entry also enables existing firms in the airline industry to attain and maintain greater market control as any new firm may easily exit due to high operational costs.

Description and graphical illustration of firm’s profit maximizing behavior in airline industry

Firms in the airline industry maximize profits at Q1, P1 where MR=MC (Baumol, W. J. 1958).This means that a firm in the industry can equate marginal cost with marginal revenue, and thus maximize its profit, even though marginal cost decreases or increases. If MC increases a bit, the profit-maximizing quantity and price remain at P1 and Q1. If MC decreases a bit, the profit-maximizing quantity and price also remain at P1 and Q1.