Does Competitive Behavior not Mean Lower Prices? Impact of Growing Demand and Limited Seat Availability in Asia-Pacific Commercial Aviation Industry

This article explores the airline industry where passengers are heterogeneous in their willingness to pay and markets are capacity constrained. Contrary to conventional wisdom, theauthor find that more intense competition can result in higher prices and a lower aggregate supply. It is shown that the price of the seat with a lower profit margin-per-unit capacity may be higher when there is a smaller number of companies in competition. It is also shown that total supply of business class seats may be reduced when there are more firms in competition. These phenomena occur because of how competition affects airlines’ seat capacity allocation among products. Interactions between competition and seat capacity constraints are nontrivial including nonmonotonic relationships.