Thursday, November 20, 2008

US Airways Relents

One model of oligopoly behavior that isn't used a lot anymore is the kinked demand curve. Basically it says that if an oligopoly lowers its price other firms will as well causing their demand curve to be more inelastic. On the other hand, if they raise thier price, they assume that others will not and hence their competitors will take part of their market share making their demand curve more elastic.

Overall, this behavior makes prices "sticky" - airline price changes don't stick unless every else goes along.

Apparently this also works when an airline reduces perks - another way of raising prices on certain customers.

US Airways is restoring key frequent-flier perks that it was blasted for eliminating earlier this year.

The Tempe-based airline today will announce the return of bonus miles and minimum mileage for its top frequent fliers, benefits that fatten members' accounts and spur loyalty...

Despite the industry's pack mentality on everything from fares to food, no one followed US Airways' decision in June to eliminate bonus mileage. For travelers in the top tier of its Dividend Miles program - those who log at least 100,000 miles a year - the move effectively cut their mileage balance in half.

US Airways was also the first airline, in February, to stop offering a minimum of 500 miles for short flights. It initially had company on that front, but United and Continental recently rescinded their policies...

Petersen said the anecdotal evidence that US Airways lost or was about to lose customers is overwhelming.

Since no one followed their lead, US airways was forced to revert back to the status quo.

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