By Dr Baljit Singh
The all-inclusive model of AirAsia often works as a monopoly. In order to de-monopolise it, a state policy that regulates the activities of the travel agents, who are linked to big hotels and travel tour, is important to maintain a certain degree of competition. It shall also ensure that local vendors get opportunities to boost their income and cultural exchange is facilitated through interactions in the local market.
Let us consider a case of a busy high-income earner who has flown all the way to India from Australia to promote his business. Most likely, he would select a predetermined travel package deal that shall already include his accommodation and travel details. It saves a lot of botheration. It is an example of an all-inclusive model and generally applies to people, who are doing reasonably well in foreign countries and do not want to bother themselves because of certain reasons.
On the contrary, a limited income earner who shall be travelling abroad would attempt to find the cheapest flight so that he could enjoy his trip, given the limited amount of income he has. He also consciously spends money on accommodation, food, and leisure of his own choice. There is nothing wrong with it. The only cost he might have to incur is a bit of time and uncertainty about price and quality. Through this, he not only saves a lot of money but also invests time in interacting with the local small vendors; he makes purchases from them boosting their income. Moreover, a process of cultural exchange takes place when you move around rather sitting in a big hotel.
Understanding the model
In the ‘exclusive’ model, the traveller books the ticket by himself and makes all the decisions related to travel using his own discretion. Therefore, there are ample opportunities to save money. If we choose to ignore the affluent class who avails the facility of travel packages, we observe that many travellers still interact with the local producers to arrive at the optimum bargained price. We need to note that freedom has its own set of advantages
People who can afford the business class travel by it. There is an additional cost for such a facility. Along the same line, there is an element of cost saving if the tickets are booked online, by cutting down on the cost of a travel agent. However, if the airline promotes the culture of online booking and customers also find it convenient, there is a probability that travel agents lose their jobs on the back of lack of demand. The implications are similar to the all-inclusive model (a complete package).
The economic study of the model
We begin the analysis by comparing two markets. One market possesses a monopoly element and offers all-inclusive tourism packages to its potential customers. Few wealthy people buy such all-inclusive travel packages. In such a scenario, these firms are price-makers (they set prices according to the demand). They charge a price that is above marginal cost (P > MC), resulting in a deadweight loss (DWL). Therefore, the monopoly market produces less than what the society demands.
A monopoly firm can avoid competition by restricting its competitors from entering the market by creating and maintaining hurdles; in the case of above example, it is an all-inclusive tourism deal. It might supply its package at a lower cost to drive small and local vendors out of the market. The monopoly firm can choose a price from a range rather than having a single price. If competitors emerge, the monopolist can capture the entire market by reducing prices. Although it is the sole producer of a product, it does not mean it charges any random price. At higher prices, fewer consumers want the product. Monopolies produce less than competitive firms because monopolies face a downward sloping marginal revenue curve and competitive firms face horizontal MR curves. For a monopoly, marginal revenue (MR) is less than price because the price must be lowered to sell the next unit. Thus, the price of the previous units also falls. We assume that the competitive firm and the monopoly have the same cost structure. Monopoly restricts output in order to keep price and profits high. Monopoly has the power to set a high price (P > MC). The buyers have no option of a potential bargain, either they buy or they don’t. In competitive markets, there are many vendors who sell a homogeneous product, and firms charge a uniform price. Therefore, P (or MR) equals MC denotes the profit-maximising output – a state of an efficient outcome. Firms earn a minimum level of profit (normal profit). Competition drives the price down.
The alternatives
Allocative efficiency means resources are put to their best possible use. No further improvements in any sphere are possible. An efficient outcome is so desirable that there is no change that would make people better off. It is not possible to make someone better off without making someone else worse off (MB = MC). If MB > MC (or P > MC), it is a state of inefficiency: Further improvements are required to be made to attain efficiency. If MC > MB (or P < MC), it is a state of inefficiency again. Excessive resources are being used in the production of commodities, which leads to the over-production.
Featured Image Source: Flickr
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