Southwest Expands Market
Southwest Airlines recently announced the addition of flights at Dulles International Airport in Washington D.C. Southwest, the nations largest discount airline, is expanding services to Washington D.C. because of the large size and rapid growth of the area. Southwest will be competing against other airlines that include JetBlue, AirTran, and United Airways.
With only three airlines servicing a large number of people, there is an opportunity for economic profits to be made at Dulles International Airport. Because there is an opportunity for economic profits, firms will enter the market. Airlines will continue to join this market as long as economic profits can be made. Southwest saw the potential profits at Dulles International, and decided to expand to that market. The addition of Southwest Airlines will drive the airline prices down. Eventually, the increase in the number of firms, and the lower prices will make it so the total economic profit is zero. At this point it will not be profitable for additional airlines to enter into this market. In the short run, economic profits will be made. In the long run however, economic profits will equal zero for the airlines involved.
2 comments:
Since Southwest has another oversea airline, it was able to maintain total revenues that were higher than its variable costs. With this other market and extra profit, Soutwest was able to survive in a time when other smaller airlines were not able to survive. These smaller airlines had to shut down in the short run because it could not maintain revenue above its variable costs.
I do not agree with Johnson’s argument. In my opinion, Southwest enlarge their business is because they want share a larger part of the market. Since Southwest is the biggest low-cost air company, it is possible for them to earn a extra profit while the other high-cost companies lost money or only earn a lower profit. With a lower AFC and AVC, Southwest can provide more airlines before its MC equal to MR. Besides, a positive economic will attract new company join this business, but Southwest has already been in this business and they are taking this economic profit. So, we should not view this for economic profit. All in all, I believe Southwest did this because they want to enlarge their profit and enhance its preponderant place in the competition in this market, rather than economic profit.
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