The costs of competition
1. Introduction
In 1997 Schnell Air entered into the Innsbruck-Turin air market which at that time existed as a duopoly market (Innsbruck Air and Turin Air). Both Innsbruck Air and Turin Air have adapted to Schnell Air's entry by either changing price or service. This paper will discuss:
? The strategic situation prior to Schnell Air entering the market (January 1997)
? Whether there is predatory pricing by Innsbruck Air and Turin Air as a reaction to Schnell Air entering the market
? A proposed strategic response by Schnell Air to the adaptations made by Innsbruck Air and Turin.
2. Assumptions made for the analysis
Fare structure: I assume that there is an uneven distribution of the different ticket classes used on each flight. More advance fare tickets are sold than full fare tickets. This distribution was assumed for all travel days (no distinction between weekdays and weekend days). For the situation prior to and immediately after Schnell Air entering the market see Appendix 2, for the distribution after the reaction of Turin Air and Innsbruck Air's reaction to the market entry of Schnell Air see Appendix 11. This assumption is, of course, flawed, since the ability of Schnell Air do adjust fare structure according to sales cannot be estimated and was not taken into account here.
Revenue estimates: The revenue projections (Appendices 5, 12 and 15) were based on the fare structure distribution shown above.
Cost estimates: For Innsbruck Air's' reaction after Schnell Air's entry into the market I assumed tripling of indirect weekly costs due to increase in flight numbers/week and to heavy advertising. For the cost estimates of Schnell ...