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Essay / Research Paper Abstract
This 4-page paper discusses airline economics and price wars. Bibliography lists 1 source.
Page Count:
4 pages (~225 words per page)
File: D0_MTaiecon.rtf
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Unformatted sample text from the term paper:
up cutting prices too. In theory, equilibrium is reached in such a situation when the lowest price is reached at a break-even point.
The airline industry, however, interestingly enough, doesnt tend to follow the "normal" rules of economics. Price elasticity isnt necessarily determined on demand, but rather, price is used to create
demand; and different prices at that. For example, three people sitting in the same airline will likely have paid different prices for their seats, depending on their reasons for flying
(business, pleasure, leisure or whatever). In her study of airline companies during the summer of 2002, author and economist Meghan Busse tested
the theory that firms in worse financial condition are more likely to start price wars than those who have a stronger financial viability. In her article, "Firm financial condition and
airline price wars," Busse examined data from 14 major airlines between 1985 and 1992 to test her theory. She points out that
one reason for this is because companies, in general, that are more financially troubled, are more willing to follow economic strategies to help raise current returns on investment, at the
expense of lower returns on investment in the future; in other words, a company might cut prices now to boost short-term demand.
This is something that airlines do on a regular basis. If anyone studies the yearly pattern of prices when it comes to airlines, the chances are pretty good that the
price wars are cyclical, in that they might happen during non-peak times (i.e., one would likely not see a price war or pricing strategies during holidays or summertime, when people
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