a) With the aid of an equilibrium demand and supply diagram, briefly

explain the following effects on the equilibrium price and quantity for the
Kuala Lumpur -Singapore air route.
i.

More new airlines were joining the competition.

In this diagram the supply curve shifts to the right. It leads to a lower price and
increase in quantity. The supply curve in a typical industry shifts from S to S2. This
decreases the equilibrium price from P1 to P2 and increases equilibrium quantity
from Q1 to Q2.
ii.

Significant increase in the price of fuel surcharges by all airlines.

If the costs of production increase, businesses cannot supply as much at the same
price and this will cause an inward shift of the supply curve. Higher fuel surcharges
prices increase the cost of producing virtually every good or service. In the case
shown here, the supply curve in a typical industry shifts from S1 to S2. This increases

the equilibrium price from P1 to P2 and reduces equilibrium quantity from Q1 to Q2.
iii.

More consumers wanted to fly to Kuala Lumpur but there was no

increase in the supply of seats by the airlines.

If more consumers wanted to fly to Kuala Lumpur but there was no increase in the
supply of seats by the airlines, which means that demand increases but supply does
not increase. The demand curve will shift to the right, the equilibrium price will
increase from P1 to P2, and the quantity demanded increase from Q1 to Q2. The
supply curve will be unaffected.

b) The Kuala Lumpur - Singapore route is monopolized by Malaysia

Airlines and Singapore Airlines. Identify the new market structure
assuming that Tiger Airways, AirAsia and Firefly were allowed to enter
the market for this air route.
The new market structure assuming that Tiger Airways, AirAsia and Firefly were
allowed to enter the market for this air route is called monopolistic competition.
c) With your answer in (b), answer the following questions:
i.

Briefly describe two (2) characteristics of the market structure.

Monopolistic competition is a type of imperfect competition such that many

producers sell products that are differentiated from one another (e.g. by branding or
quality) and hence are not perfect substitutes. In monopolistic competition, a firm
takes the prices charged by its rivals as given and ignores the impact of its own prices
on the prices of other firms.
Monopolistically competitive markets have the following characteristics:

Relative freedom of entry into and exit out of the industry

Monopolistically competitive firms, like perfectly competitive firms, are free to enter
and exit an industry. The resources might not be as "perfectly" mobile as in perfect
competition, but they are relatively unrestricted by government rules and regulations,
start-up cost, or other substantial barriers to entry. While some firms incur high startup cost or need government permits to enter an industry, this is not the case for
monopolistically competitive firms.
Similar, But Not Identical Goods
Each firm in a monopolistically competitive market sells a similar product. Yet each
product is slightly different from the others. The term used to describe this is product
differentiation. This characteristic means that every monopolistically competitive firm
produces a good that is a close, but not a perfect substitute for the good produced by
every other firm in the market. As such, different firms can charge slightly different
prices. This characteristic means that every monopolistically competitive firm
produces a good that is a close, but not a perfect substitute for the good produced by
every other firm in the market. As such, different firms can charge slightly different
prices.
ii.

Suggest two (2) possible reasons that the route is difficult to

compete with better in-flight services.

On the opposite end of the spectrum is perfect competition. Perfect competition is

pretty much just a theoretical concept and never actually exists, but some industries
can come very close to perfect competition. Some items sold on eBay approach
perfect competition. Suppose people on eBay are selling a book for which there are
many, many sellers selling identical editions of the same best-selling book. Adding in
shipping and handling, you will find that people are all buying the book for almost the
same price. An eBay seller could not sell the book for more than that price, and people
will bid up the price to the going price. Each individual seller sells the book at a price
set by the market and has virtually no power to set prices.
iii.

Give two (2) likely examples that the airlines would compete with
each other to gain a bigger share in the market.

A low-cost presence is estimated to cause a flatter price distribution, a higher degree

of competitiveness, and a decline in the relevance of concentration, frequency, hubs,
and capacity constraints in predicting market prices. This new breed of air carrier
disciplines the incumbent major carriers that rely on market dominance to extract
higher rents to support the higher cost basis of the hub-and-spoke networks these
airlines use. The disciplining effect of low-cost carriers on the premium major airlines
derive from hub airports may indicate that the higher cost basis of a traditional hub is
no longer justified.
Moreover, the low-cost airline model, which is built around using a point-to-point

network, should continue to be a successful model for new entrants. While it is

unlikely that any major carriers will completely abandon their hub-and-spoke
networks, the partial dismantling of those hubs, in the form of de-peaking, will
continue. Market forces have and will continue to cause these structural changes.
Furthermore, there are policies can accelerate this shift and the magnitude of the lowcost presence in the airline markets.

iv.

Suggest two (2) possible impacts if a price war were to erupt when
the budget airlines join in the competition.

Lower income consumers tend to reduce their air travel than high income consumers.
Low income consumers are more likely to change their demand patterns during
periods of economic recession due to low purchasing power and elasticity of price is
high to them. Despite of travelling to long distance places with airplane, they reduce
the costs by travelling to nearby places by land transportation for holidays.
In addition, airline industry such as AirAsia is oligopoly market due to only few firms
are providing the air travel services to many consumers in the market. The barriers of
entry are very high, one of the main barriers is high set up cost. Airline industry
requires large amount of money to buy airplanes, hiring employees and advertising.
Although AirAsia has the power to control over the price of air fares due to low
number of firms in the market, their pricing strategy will still effect by the
competitors because their customers may switch to another airline industry if the price
is lower.

Referencing Lists
1.

AirAsia.com (2013) AirAsia retains TOP spot in Smart Travel Asia 2013 Best in
Travel Poll Top 10 Budget Airlines category. Avaiable
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2.

AirAsia.com (2013) Corporate Profile. Available

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March2015].

3.

Allen (2013) The Cheapest Time of Year for Airline Travel. Available
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[Accessed 22 March2015].

4.

BBC (2010) Air travel drops for second year during recession. Available
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5.

BBC(2012) Air Asia hit by high fuel costs. Available

from:http://www.bbc.co.uk/news/business-17131282 [22 March2015].

6.

BursaMalaysia (2013) Quarterly rpt on consolidated results for the financial

period ended 30/6/2013. Available
from:http://www.bursamalaysia.com/market/listed-companies/companyannouncements/1382517 [22 March2015].

7.

CAPA (2013) AirAsias 2013 outlook marred by intensifying competition and

continued losses at new affiliates. Available
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8.

Gupta and Delhi (2013) AirAsia: The low-cost card may not fly in India.
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