Transport Economics and Policy
Introduction
Aerospace transportation is one of the most important means of transportation nowadays. With the drastic changes happening in relation to science, technology, communication and business, the role of airlines are becoming more and more in demand, especially to continually developing cities, such as Hong Kong. Because Hong Kong is considered an international business hub, several local and international airline companies are based in the city, which contribute to its economic growth and development. With this importance, this paper will do an analysis on the airline market of Hong Kong in relation to economic characteristics and theory.
Hong Kong’s Airline Market
A number of local and international airlines are operating in the city of Hong Kong, which, as mentioned, contributes to its economic growth and development. The airlines in the city include Cathay Pacific, Dragonair, Oasis, Hong Kong Express Airways and Air Hong Kong. These major airlines are involved in the transportation of passengers and goods from Hong Kong to other parts of the world, and vice versa.
In relation to its market structure, the airline industry in Hong Kong is characterized by an oligopoly market structure. An oligopoly market structure is the dominating market structure in modern economies (1997) such as Hong Kong, such that only a few firms dominate a specific industry (2000; 1999), including its airline industry. In oligopoly, each member is subjected to sufficient inter-company rivalry, which in turn prevents other from owning the market demand curve. Since there are a few members or participants in this market form, each member is interdependent of the actions of other members, such that it is characterized by interactivity, with the decisions of other members mainly influence all of the members. The airline industry of Hong Kong is characterized by an oligopoly for each airline company interacts with one another and competes with each other in relation to prices. In addition, the type of oligopoly exhibited by Hong Kong’s airline industry is the non-collusive oligopoly for each airline company or oligopolist does what is best for its firm, given what they think the other firms in the market will choose to do (2007). The actions are said to be characterized as non-collusive because each airline company in the industry individually come up with different marketing strategies that would enable it to attract and retain customers.
Aside from the airline industry, oligopolies and monopolies also exist in other industries such as container terminals, drugstores, electricity or energy industries, piped gas, electronic payment systems, driving schools, the fuel or petroleum industry, asphalt, cement and concrete industry, cable and terrestrial TV industry, and games including gambling ( 2001). Price leadership also exists in these types of oligopolies, as in Hong Kong, several businesses dominate their industry. Example of such dominance can be seen in the supermarket industry, as being long dominated by two chains with an estimated 70% market share; in banking, the market leader is HSBC or the Hong Kong Shanghai Banking Corporation Holdings; in telecommunications, Cable & Wireless, or now known as C&W HKT is the leading company, and in the airline industry, Cathay Pacific Airways is the ultimate controlling company (2001).
The market of Hong Kong is characterized by free trade or free port, such that its market has almost no tariff or non-tariff barriers and freely convertible currency, and its direct taxation and regulation is low. Nevertheless, in the domestic side of the economy, the lack of regulation allows a system of entrenched cartels or oligopolies, hampering its economic efficiency (2001). Because of this, it is easier for international businesses and corporations to enter its economy as a means of their expansion and development. However, although free trade is exhibited by the Hong Kong market, the existence of monopolies in the airline industry is still inevitable. Although the airline industry in Hong Kong is said to be an oligopoly market form, Cathay Pacific Airlines still dominates the industry, thus, monopolizing the whole airline industry. This is being tolerated in Hong Kong because price fixing and cartels are legal in the city, which results to too few players dominating certain sectors in the economy, such as the airline industry. The absence of a general competition law also hinders the efforts of authorities to investigate anti-competitive behavior and trigger a remedial process (2007). Because Cathay Pacific has a British company as its major stockholder, it is being protected from government intervention ( 2001). A monopolistic system is being prevented in any economy because competition is lessened. With this, Hong Kong’s government dismantles these cartels as their “sector specific” approach to competition regulation. As an action, the government has dismantled the protection enjoyed by Cathay Pacific Airways, whose ultimate controlling shareholder is a British company, the John Swire & Sons (2001).
In a monopolistic environment, the barriers to entry are very high that no other companies can operate in the industry. However, as other yet few companies can enter an oligopolistic system, barriers to entry are not as high. Barriers to entry pertain to the degree to which new business entrants is restricted or controlled within an industry. The presence of entry barriers then help in regulating competition within the system, directly benefiting the business operators. When firms become successful in an oligopolistic system, dominant market presence and established reputation are achieved. Market share is also concentrated to only a few competing firms. This makes competition even harder for new and smaller companies to enter the industry ( 2001).
As the limited number of companies compete with one another, business organizations are more efficient in responding to various performance pressures; moreover, they tend to work extra hard in preventing slack in inputs. In turn, resource allocation becomes more efficient; specifically, companies are more after cost-effective strategies that will allow efficient capital allocation. In addition to this, resource allocation is also enhanced in competitive market forms as business organizations become more innovative. The objective of the companies within a competitive market environment is to provide the best to the consumers; this in turn is achieved through innovation. With this strategy, companies will be able to make their products stand out in the market and eventually overcome threats of rivalry. Consumers are given with quality goods, resulting to efficient resource allocation (2002). Aside from innovativeness, efficient resource allocation is also achieved through competitive market reform by means of diverse products and services that consumer can benefit from.
With this market system characteristic, oligopolists depend very closely upon the actions of the others operating in the same market. Their behavior is necessarily influenced by the realization of mutual interdependence (1996). The economic theory of interdependence is based on the tendency of competing firms to follow the actions or strategies of their rivals. One example of interdependence among oligopolists is the issue on price. In oligopoly, each firm knows that in initiating price changes, other firms will also react to them. In assessing the net effects of a price change, it must take account of the probable reaction of others. If a firm decides to change the price of its goods, the company considers not only the general market situation and its own financial and stock position but also the probable behavior of its principal competitors. Within the oligopolistic environment, raising or lowering prices as well as implementing new marketing strategies will most likely are copied by rivals. While members of an oligopoly compete by reacting to ones actions, their interdependence to one another also allows them to establish business agreements. An oligopolistic situation is frequently accompanied by market-sharing arrangements between a number of producers or firms. Oligopolists involved in mutual interdependence find it convenient and profitable to coordinate their policies and strategies together. Considering that the number of interdependent firms is minimal, cooperation is easier (1996).
In addition to this, monopoly markets are being controlled by the Hong Kong economy through the provision of the new proposed anti-monopoly law, which is designed to prevent price marking, thus, protecting consumers and Hong Kong’s increasing entrepreneurs from over-lording cartels (2006). Moreover, this law will be implemented because the free flow of capital, low taxes, minimal government intervention and free port status with no tariffs have been overplayed and have been able to edge smaller overseas competitors out of the market ( 2006). In addition, Hong Kong has also recognized the need for a Competition Law in order to encompass horizontal and vertical collusive agreements, including the abuse of dominant position in the industry ( 2001). In this way, smaller companies in the airline industry, including the airlines’ competitors, such as the British Airways, China Airlines, China Southern Airlines, and Singapore Airlines (2007) would have equal opportunity to grow and profit from the market of Hong Kong. Moreover, each company in Hong Kong would be able to have the chance to maximize its resources without the threat of being subdued by other companies belonging in a cartel or monopoly. In relation to this, concentration ratios would be useful. Concentration Ratios shows data, which indicates the percentage value of shipments, accounted for by the 4-, 8-, 20-, and 50 largest companies for each manufacturing industry (2005). The use of these data would be essential to indicate the achievements of different countries belonging to different industries, and to indicate the stand of the company in the overall economy. From this, companies would be able to assess and evaluate their performance, and be able to maintain and sustain it to continually profit from its market and from its industry.
Conclusion
Oligopoly is a market system wherein few companies operate and compete in a certain industry. Compared to other market forms, oligopoly has dual features of both monopoly and competition systems. Through its monopolistic features, oligopolists are able to operate with less rivals; this in turn allow them to obtain considerable shares of the market. This also helps in limiting the level of competition observed in the market, making business progress faster among limited firms. The efficiency gains of an oligopolistic system is then concentrated on the fact that both operators and consumers benefit from this type of market system.
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