Influence of rivalry among competitors Rivalry is the competitive struggle between companies in an industry to gain market share from each other. A more intense rivalry usually means that there are lower prices and more spending on non-price-competitive weapons. These would be things such as in-flight complimentary items like drinks and snacks. A more intense rivalry will lower prices and raise costs. This means that this makes the window for profitability smaller.
If the rivalry is less intense, the company can raise its prices and spend less money on non-price-competitive weapons. This would mean an increase in industry profits. There are four main factors that deal with the intensity of rivalry among competitors in an industry: industry competitive structure, demand conditions, cost conditions, and exit barriers. The competitive structure of an industry refers to the number and size distribution of companies in the industry. There are two types of industries: the fragmented industry and the consolidated industry.
A fragmented industry is an industry with a large number of small to medium sized companies that aren’t in a position to determine industry prices. This is not the airline industry. The airline industry is a consolidated industry, which is an industry dominated by a smaller number of larger companies that are in position to determine industry profit. Companies in the airline industry are interdependent, because any competitive move that they make directly affects the market share of its rivals and their profits. If one company makes a move, this makes the other companies have to react to that move.
So if a big company like Southwest airlines significantly drops their price or offers something like free luggage, a company like US Airways will have to think about either matching that offer or making a better one. The rivalry between companies increases as companies try to have the lowest price or offer more value to the customers. This in turn makes profits for the industry decrease. For the most part, companies in the airline industry offer the same general product, so they have to compete on total time spent on airplanes and number of connections. A second determinant of the intensity of rivalry among competitors is the ndustry demand. If demand for the industry increases, this tends to decrease rivalry because companies can then sell more without taking away market share from other companies. This then increases industry profits. If there is a decrease in demand in the industry, this then increases the rivalry between the companies. The only way for a company to grow is to take market share away from their competitors. So if more people want to fly instead of other modes of transportation, then this will generate larger industry profits because there is less competition between the companies.
The industry doesn’t want to see a decrease in demand, because there is more rivalry between the companies, driving price down and resulting in a decreased industry profit. The third determinant of the intensity of rivalry among competitors is cost conditions. If a company’s fixed costs are high, then profitability is highly leveraged to sales volume. Then companies are trying to increase the sales volume which increases the rivalry between the companies. In the airline industry, fixed costs are very high.
An example is having to pay just to land at an airport, labor fees, and cost of the airplanes. When fixed costs are high and sales volume is low, then the companies can’t cover their cost. This makes the companies start cutting their prices and spend more money on promotion in order to increase their sales volume. This then increases the rivalry among the companies, and in turn leads to lower profits. The last determinant of the intensity of rivalry among competitors is exit barriers. Exit barriers are economic, strategic, and emotional factors that prevent companies from leaving an industry.
If exit barriers are high, then companies become locked into an industry where overall demand is static or declining. This results in excess productive capacity, which leads to an increased rivalry and price competition, and lower profits. But exit barriers are not high in the airline industry. Planes can be easily sold to other companies, and gates and landing rights can be sub-leased to other carriers. So exit barriers don’t really have an effect on the profitability of the airline industry.