Nature of competition in the market and strategies of long‐term profitability

The nature of competition on our market is oligopoly and monopoly. This is explained by the fact that we are dealing with discrete competition as the firms compete differently for different routes.

There is an oligopoly on routes where the air transportation services are offered by several companies. In this case, because the oligopolists compete on a price basis, the Bertrand oligopoly model is in effect. However, since the services offered by various companies on the same route are, in most cases, at least slightly different (heterogenous products), the companies are able to have some profits and offer their services at prices above costs.

On routes where only one air carrier is present, there is a monopoly. The monopolist can set his price depending on the maximization of profit, without considering any competitors.

To make profits in the long-run, on routes where an oligopoly is in effect, the firms are recommended to differentiate their services. In this cases, they will be able to occupy different market segments (e.g. luxury segment and economy segment) and avoid destructive price competition (although some price competition will still exist). It is also rational for these firms to collude. The problem is, however, that on the most attractive and profitable routes, many companies are present, so it is more difficult to organize a collusion. The more oligopolists there are, the higher is the probability that one of them will decide to break the tacit collusion.

For routes where only one firm operates, it is rational for these firm to avoid other firms to start offering services on this route. In the case of Russia, this is often done by agreeing (often illegally) with airports not to let other firms operate on these routes or by bribing the government officials who will prevent other companies from entering the markets of these routes. Otherwise, the monopolists should consider limit pricing and predatory pricing. There are, however, certain problems associated with these two actions. Firms that operate on such routes are very often inefficient. It is difficult for them to lower the price to such a level that will discourage other firms from entering the market (limit pricing). Furthermore, even if they set a lower price, the entrant firm may be not discouraged from entering. This may be explained by the possibility that new entrants are likely to be more ambitious and efficient companies than the monopolist and that they will be, thus, able to bear the monopolist’s limit prices and still make profits (the costs curves of the entrants may like significantly lower than the cost curves of the incumbent firm). Predatory pricing may also be difficult to implement for several reasons.

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1 http://premier.gov.ru/events/news/14171/

2

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20 http://elibrary.ru.ezproxy.gsom.spbu.ru:2048/download/17301461.pdf

21 http://c-ca.ru/assets/files/fin.pdf

22 http://elibrary.ru.ezproxy.gsom.spbu.ru:2048/download/17301461.pdf

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24 http://pravo.ru/news/view/62067/

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26 http://russianamericanbusiness.org/web_CURRENT/articles/662/1/Passenger-air-transportation-in-Russia

27 http://c-ca.ru/assets/files/fin.pdf

28 http://elibrary.ru.ezproxy.gsom.spbu.ru:2048/download/41187112.pdf

29 http://www.naukom.ru/articles/311/

30 http://www.ato.ru/blogs/blog-alekseya-sinickogo/izmenenie-rasstanovki-sil-na-rossiyskom-rynke-perevozok

31 http://www.bigness.ru/articles/2011-04-08/news/123557/