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he article, Warren Buffet is betting the Airline Oligopoly is here to stay, clearly, identifies that Airline industry is oligopolistic in nature. According to Warren Buffet, he suffered financial losses when he first made an airline investment and vowed not to invest in the sector he referred to as “death trap.” Despite that he still went ahead and invested more than $1.2 billion in the four largest airlines in the United States, and took stakes in different airlines such as American Airlines, United, and Delta, as well as South West Airlines. There are several factors that changed his mind to invest in the “death trap” sector as he put it.

The industry was unprofitable for several decades until 2010 that the industry observers discovered the airline industry was beginning to be profitable again.  Some of the Airline industry profits were due to the innovative pricing models that were adopted; however, two most vital structural changes were mainly responsible for the increase in profitability. Firstly, the industry experienced multiple mergers brought about by the intense lobbying efforts, which made the industry more concentrated, making it more oligopolistic in nature (Schmalz, 2016). The second and final structural change in the industry which is largely not noticed by the regulatory radar and the public is the acquisition of significant stakes in competing airlines by a small set of large institutional investors, for instance, State Street, BlackRock, PRIMECAP and Vanguard some of the top seven investors for all the four major airlines in the U.S. (Schmalz, 2016). The major airlines in the U.S. have one thing in common, that is, their largest investors. The stakes of such investors are not small minority stakes as they hold about 40 percent of the vote share which allows them to completely control a company. According to the article, such common ownership links usually results in a reduction in seat capacity and increment in prices, just like the case with consolidation by mergers.

Market share is zero-sum because the share gained by one firm is lost by the competitor. Therefore, there is stiff competition in the airline industry. However, the involvement of Warren Buffet in the airline industry is expected to assist in lessening the competition existing among the airlines thus improving their profitability further (Schmalz, 2016). The vast degree of the United States airline industry’s common ownership has ended the price wars experienced in the 1990s thus increasing profits, making the industry investable (Schmalz, 2016). According to the article, the stakes Warren Buffet has accumulated are quite large that they helped in further consolidating the industry which enabled the stock prices of the airlines to take off. Instead of competing in delivering better services at lower prices, the four airlines are interdependent thus soaring together.

The article relates to the course by talking about the characteristics of oligopoly, the features of the U.S. airline industry. Firstly, oligopoly in general terms refers to a market structure where a few firms dominate the market by supplying or providing a homogenous or differentiated services or goods (Cabral, 2012). Such firms hold the market share and the business decisions of the market. The first characteristic of the oligopoly that is clearly demonstrated by the article is interdependence of firms. Instead of competing to gain more market share, the four main U.S. airlines are cooperating for profit maximization. The collusion or collaboration of the airlines reduces the fear of price war. The four main U.S. airlines have tacit collusion where they have an understanding amongst themselves to cooperate and avoid engaging in aggressive marketing or price war (Cabral, 2012). This has helped them in maximizing industry profit which has made their stock prices to take off.

On the other hand, in the long run, the airline industry experiences some types of barriers to entry which restrain new firms intending to enter the industry. Such factors include the economies of scale the few large firms enjoy, for instance, the large sizes of the four top airlines in the U.S. hinder new firms from entering the industry as they just suffer financial losses. Also, the industry has large capital requirements because of the huge costs of planes (Cabral, 2012).  Finally, the airline industry discussed in the article lacks uniformity. Being an oligopolistic industry, there is no uniformity in the size of the firms; they differ considerably in size as some companies are very large and some may be small. In addition, there is price rigidity; the four airlines have to stick to their prices to avoid the possibility of price wars which does not benefit any firm (Cabral, 2012).

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