Jumbo Airlines operates out of three main “hub” airports in the United States. Recently, Econo Airlines began operating a flight from Reno, Nevada, into Jumbo’s Metropolis hub for $190. Jumbo Airlines offers a price of $425 for the same route. The management of Jumbo is not happy about Econo invading its turf. In fact, Jumbo has driven off nearly every other competing airline from its hub, so that today 90% of flights into and out of Metropolis are Jumbo Airline flights. Econo is able to offer a lower fare because its pilots are paid less, it uses older planes, and it has lower overhead costs. Econo has been in business for only 6 months, and it services only two other cities. It expects the Metropolis route to be its most profitable.
Jumbo estimates that it would have to charge $210 just to break even on this flight. It estimates that Econo can break even at a price of $160. Within one day of Econo’s entry into the market, Jumbo dropped its price to $140, whereupon Econo matched its price. They both maintained this fare for a period of 9 months, until Econo went out of business. As soon as Econo went out of business, Jumbo raised its fare back to $425.
Instructions
Answer each of the following questions.
Who are the stakeholders in this case?
What are some of the reasons why Econo’s break-even point is lower than that of Jumbo?
What are the likely reasons why Jumbo was able to offer this price for this period of time, while Econo could not?
What are some of the possible courses of action available to Econo in this situation?
Do you think that this kind of pricing activity is ethical? What are the implications for the stakeholders in this situation?
