South-Western College Publishing - Economics  
Will Air Fares Go Sky High?
Subject Oligopoly, Price Leadership
Topic Product Markets
Key Words Fares, Price Strategies, Demand
News Story The airlines are attempting to raise fares across the nation. Continental Airlines was the first to increase its fares by 5 percent. Later the same day, Delta and US Airways followed suit. The implication was that a 21-day advance purchase fare on Continental from New York to Dallas rose from $462 to $485.

The context is that airplanes are flying very full, and business fares are up by 7 percent over a year ago. A Delta spokesperson explained that the airline's decision to increase fares was prompted by consumer demand and by other airlines' price strategies. There is no guarantee that the price hike will last, however. Previous fare increases in 1998 were reversed.

Travelers are also suffering higher hotel room rates, which are expected to be 5 percent higher in 1998, and more in some locations.
(Updated June 5, 1998)

Questions
  1. Delta Air Lines reports that it based its fare increase in part on the actions of its competitors. How do you know from this that the airline industry is not:
    1. perfectly competitive?
    2. a monopoly?

  2. Why did Delta wait to put its fares up until others did the same in spite of seeing its planes nearly full?

  3. What factors might cause the fare increase to be rescinded, as happened with previous attempts to increase fares?

  4. Why in contrast did hotels find it easier to sustain increases in room rates? Refer to the market structure of the hotel industry and its implications.
Source Donna Rosato, "Holiday travelers hit with fare hikes," USA Today, May 22, 1998.

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