International university
School of economics, Finance and Accounting INTRODUCTION TO MICROECONOMIC
Name : Lê Thị Hồng Thắm Id : BAACIU21199 Leture : Thảo Hiền Bùi
1 How does market structure impact the behavior of Vietnam airline providers in terms of pricing and production decisions?
Vietnam’s airline industry operates within a particular market structure and plays a critical role in driving economic growth and tourism. It has significant influence
over the pricing and production choices airlines make. Therefore, it is important to understand this structure especially the level of competition in order to anticipate
how airlines are likely to respond and how their responses will affect consumers.
A Wide Range of Rivals: Vietnam's Position?
Market systems can be divided into various categories that depend on the number of players involved and the degree to which price is regulated. Perfect competition,
where there are many small firms offering similar services, cannot occur in Vietnam due to large capital requirements for setting up an aircraft. Equally unlikely is it
for there to exist one dominant airline (monopoly) but rather a dominant carrier with substantial market size is possible.Hence, Vietnam’s airline sector is probably
best characterized as an oligopoly
.. Some major carriers such as Vietjet Air and Vietnam Airlines have an influential say in decisions yet control a lion share of the market. This makes airlines scrutinize
their rivals’ activities before settling on prices or fixing their schedules because the industry is highly volatile.
Airlines’ competitors always monitor the airline’s prices, which causes strategic reactions:
- Price Leader: In an effort to prevent a price war, a leading airline may set a base price and encourage others to match it. Although this guarantees
profitability for all airlines, it may lead to higher pricing for consumers.
- Matching Prices: In order not to lose market share, airlines might respond promptly by matching the price changes made by their competitors. This ploy
ensures competition among airlines as well as reducing the difference in prices.
- Product Differentiation: To survive in a crowded market, airlines can either target specific types of passengers like business travelers versus budget
customers or offer unique services such as inflight meals and luggage allowance.
Oligopolistic decisions on production are affected by the conduct of its competitors too. Airlines may:
- Matching Capacity: In order to prevent oversupply or under-supply to market, airlines might alter the number of flights for such a route until they tally
with that of their opponents. This can ensure efficient resource allocation while curtailing competition.
- Efficiency Orientation: In an oligopoly characterized by limited price elasticity, optimizing operations and reducing costs become important. Airline
businesses that are able to maintain profitability yet offer low-pricing stand a higher chance of success.
The government also intervenes in influencing production and pricing decisions in Vietnam airline industry:
- Price regulation: Government-imposed price floors and ceilings which though fewer cases has the potential to distort markets thereby decreasing
competitiveness. A careful thought about this plan needs to be taken into account so as to avoid unforeseen consequences.
- Investment in Infrastructure: Upgrading air traffic control towers as well as airports could enhance airline efficiency and possibly lead to cheaper ticket
prices eventually. This leads to a positive market atmosphere that benefits both clients and airlines alike.
2) What is the Vietnam government’s price intervention for domestic airline tickets?
The airline industry of Vietnam has witnessed an upsurge in recent years and it is now a major player in Southeast Asia. To understand this growth, we need to
consider the structure of the market as well as how airlines make decisions about price and quantity.
Vietnam’s aviation sector is characterized by oligopoly. Some few dominant players such as Vietnam Airlines, VietJet Air and Bamboo Airways own a big part of the
market. This gives them some power over prices. The Vietnamese government also affects pricing by:
- Price Ceiling: Government may set a maximum fare that airlines can charge to ensure that flights are affordable to consumers but they can end up limiting airlines’ profit.
- Taxes: Taxes imposed on airlines or their fuel can indirectly affect prices charged for tickets.
- Route Allocation: The government may regulate which airlines serve specified routes thereby influencing competition and pricing on those routes.
However, it should be noted that even without explicit price controls, the presence of the government can affect airline behavior. Price strategies designed to be more
customer friendly are encouraged due to threats of regulation or intervention through consumer-friendly pricing strategies among carriers being regulated.
3) What are the effects of implementing price intervention on market equilibrium and total surplus? Based on your opinions, should the Vietnam
governmentapply price intervention for domestic airline tickets? Explain in detail and draw models
In a properly functioning market, supply and demand achieves a harmonious balance at the equilibrium point. Nonetheless, policymakers occasionally disrupt this
delicate dance by introducing price controls such as price ceilings and price floors.
While these measures may target social goals, they can significantly change both market equilibrium as well as total surplus by causing inadvertent consequences.
This discussion will explore how price intervention undermines free markets and reduces overall economic welfare. Price ceilings serve as government imposed
maximum prices that impede attainment of equilibrium. Imagine an airline ticket market.
At the equilibrium price for tickets airlines are willing to sell (quantity supplied) is equal to the number of tickets consumers want to buy (quantity demanded).
However, if a ceiling is set below this level, then airlines are less likely to offer flights due to lower profit margins.
This results in excess demand. In essence, buyers desire more tickets than sellers are ready to provide them with because they cost less than their true value leading to
a deficit. Essentially, these signals get distorted by price ceilings in markets thereby disrupting
4) How do changes in the cost of production influence Vietnam airline providers' supply decisions and overall market dynamics?
For Vietnam, the airline industry has always been a critical factor that drives both economic growth and tourism; in fact, it continues to present an ongoing challenge –
how to manage production costs within a fluctuating environment. Therefore, understanding these costs and how airlines adjust their supply decisions is vital in
navigating market dynamics and ensuring the industry’s survival.
Fueling the Equation: The Impact of Changing Prices
Airline companies incur significant jet fuel expenses while operating planes. These prices are never constant thereby leading to fluctuations in costs. This can be
mitigated using various approaches such as:
- Hedging: Airline companies may go into contracts which guarantee them constant fuel prices at certain levels hence protecting them from price spikes.
- Fuel-Efficient Aircraft: Airlines investing in newer airplanes that consume less fuel could greatly reduce long-term gas consumption levels.
- Route Optimization: Some airlines may modify flight paths to minimize fuel burn even if it means taking slightly longer travel times.
- Reduce Capacity: The number of flights offered may be slashed especially on less profitable ones to reduce fuel consumption
This however reduces market share and revenues.Increase Ticket Prices: To maintain profit margins, carriers could hike prices for tickets thereby potentially reducing
demand and passenger numbers.Production costs do not stop at fuel. Labor costs such as salaries for pilots, cabin crew and ground staff can also be substantial.
Moreover, costs relating to landings, takeoffs and other services in airports come into play. Also, maintaining and repairing aircrafts require significant investments.
Increase in any of these areas can push airlines to make similar changes including limiting capacities, raising ticket prices or optimizing operations through automation
or training their staff.Vietnam’s airline industry is characterized by highly competitive conditions that change rapidly. Carriers must always study these dynamics —
competitor strategies, consumer tastes as well as profitability of routes — so that they can make informed choices. Understanding these forces is important for pricing
strategies, types of services rendered, route expansion plans among others. Vietnamese airlines face various supply adjustments when the production costs go up, just
like their global counterparts:Route Optimization: Airlines may choose to focus on more fuel-efficient routes or combine less profitable ones that will have an effect
on availability of flights in certain areas.Aircraft Fleet Adjustments: Airline companies can decide to phase out older aircrafts that are not as fuel efficient as new
models in a bid to reduce fuel consumption.Changes in Flight Frequencies: One method an airline can use is reducing the number of daily flights on selected routes
thereby affecting travel options for customers.Market dynamics are also affected by these changes. High fuel costs can result in reduced capacity and hence higher
competition on remaining routes and may drive prices down. Alternatively, carriers could opt for implicit coordination raising fare levels together with maintaining
profitability; however, concerns about cartel formation would arise here.
5 Do you agree with this opinion: “More new airlines will be established, increasing competition, supplementing supply, and making airplane ticket prices as
affordable as the situation in Thailand”.
Explain your answer in terms of the level of competition, cost of production, consumer welfare, producer welfare…
Due to its ability to facilitate commerce and travel around the globe, the airline sector plays a crucial role in the global economy. The establishment of new airlines has
become fascinating due to the growing need for air travel. Disagreements also stem from the belief that there would be more airlines established, more competition, a
wider selection, and airfares that are comparable to those in Thailand.
While there are advantages, it is difficult to lower airfares on all CAA-observed carriers at the same time. The overhead expenses associated with running airlines are a
major element in this. The whole cost of manufacturing includes expenditures for infrastructure, tools, fuel, maintenance, and equipment.
The airline sector helps to link people, facilitate travel, and encourage trade between various geographical areas. There is a lot of discussion on the potential entry of
airlines into the market due to the growing demand for air travel.
Many people think that the entry of new airlines would improve competition, which will increase supply and maybe drive down travel rates to levels comparable to those in Thailand.
Imagine that you have a strong desire to travel and that you have extra money in your pocket. That's the type of stuff that keeps airlines growing! The demand for
flights soars as more people enter the middle class and travel becomes increasingly popular. Airlines now have a fantastic potential to grow as a result.
Good news too for those who want to start their own airline. Less limitations have made it easier to enter the sector. Additionally, the cost of producing airplanes is
decreasing down, and financing choices are getting easier to come by.
Travelers like you and me find things more intriguing when more airlines are involved. Airlines engage in price wars and exclusive offers as they compete for our
business. A greater selection of flights at reasonable prices and more transparent pricing may result from this intense competition. In other words, you have more
alternatives and may shop around for the greatest price on your next trip.
But not everything is sunshine and rainbows. These exclusive offers are always beset by airline operating charges. Therefore, even if competition might result in lower
pricing, continuously fair ticket prices are not always guaranteed.Even with all of this competition, airline tickets aren't amazingly inexpensive. Operating an airline has
a significant financial cost, much like producing anything. They have to pay for fuel, maintain all those expensive airports they use, staff their trips, and keep their
aircraft in excellent condition. Furthermore, the government enjoys taking a piece of the action through taxes and levies, which makes it much more difficult for airlines
to maintain such low rates over time.
Therefore, while additional airlines may result in increased competition and therefore reduced costs, this is not a given. The price of taking a plane to your ideal
holiday destination is determined by several factors. REFERENCES
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