The
primary reason a firm is in business is to get a return on investment (profit).
A company makes a profit when marginal cost equals marginal revenue. A firm is
at lost where the Short-run/ long-run marginal revenue is below average cost.
At a price where marginal revenue is equal to marginal cost or above, the firm
is in Economic profit. In this case
study, it can be concluded that United
Airline is operating in the market under oligopoly; "where a small number
of firm constitute the market"(Brickley, Smith, & Zimmerman, J.,
2016).
To see why a company will remain in a market
where marginal cost is not equal to marginal revenue or "where the price
of the product is insufficient to cover the average variable cost, we approach
it from the theory of Future Demand. Future Demand is the anticipation or the forecasting
of future sales of company's product. We
can see that firms will sometimes anticipate future demand for a product but
not at the present (Brickley, 2016). During the period, we assume the firm is operating just above break-even point.
Furthermore,
firms sometimes uses Incumbent advantage (Brickley, 2016) in the market. In the
short-run, the firm is not so concerned about the present price of its product
in the market; it is more concerned with the long-run return on investment. All
these tools are used by firms in the hope
that when demand increases, they would have passed the learning curve stage in
the market. This can be well explained by
the research conducted by Vinay Bhaskara in 2015;
Over
time, we expect United’s hub at Dulles (Washington) to converge on an
international O&D focused operation with service to key business domestic
destinations to retain corporate contracts dependent on DC and offer some feed
for the international routes. In other words, United’s Dulles operation will
look a lot like that of the new American at New York JFK. This does mean that the small cities –
Charleston, Albany, Columbia, Charlottesville, Greensboro, and the like – will
likely be dropped (Vinay B., 2015).
In retrospect, it will be
advantageous for United to remain in Washington DC Dulle Hub. The prospect of
raise in demand for flights from Washington DC is bound to increase, and United
Airlines will be at the forefront of other Airline in capturing the market
since it already has a presence and does not have the issue of a new entrance
to the market. Furthermore, if United relinquish the market, the cost of entry
when the market demand increases might be too high. As long as the Total
marginal revenue is above Total average cost, United should remain in the
market.
References
Braskara,
V. (2015). Analysis: What does the future hold for United at Washington Dulles?
Retrieved from: http://airwaysnews.com/blog/2015/12/01/analysis-what-does-the-future-hold-for-united-at-washington-dulles/
Brickley,
J., Smith, C., & Zimmerman, J. (2016). Managerial economics and
organizational architecture (6th ed.). New York: McGraw Hill/Irwin
MEGAMIKEJR
(2013). Airline Costs and Expenses.
Retrieved from: http://megamikejr.com/blog/business/airline-costs-and-expenses/
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