[Not a bug] Market share model

[giocal]

ID: 199317 (route)

Type: strange competition model

Description:

I represent one of the three companies operating on the indicated route. Since I had a market share of 34%, having a LF next to 100% on my aircraft and the lowest priced tickets (actually, my aircraft is smaller than those used by my competitors, so I have less seats available on the route even if flying more frequently). In order to increase my market share, I managed my aircraft schedule in order to increase the frequency of flights to Geneva (having the cheapest tickets would have meant, in my opinion, to "steal" passengers of my competitors. The strange thing that happened is that increasing my frequency (from 4 to 6 round trips per day) lowered my load factor, so I had to reduce my prices in order to mantain a reasonable profit. This is of course correct if there is non competitione on a route, but it doesn't seem to be realistic if there are competitors who are less competitive than you are. Please let me know if my thoughts are correct...

Thanks! Gio@GC Airlines

Airline Details: GC Airlines (GCX) - ID 8684

[Hot Drink]

This is totally not a bug, when you maky a higher Freq. in a route, it also improve the demand. Although u can steal some passenger from the others, but not all. Some of them will still choose the others although u are the cheapest.

[giocal]

Sure, but the starting situation was me having all my available seats occupied (= all potential customers chose my service if available). Increasing the available tickets I espected to increase my profit without lowering prices once again (now they are really lower than my competitors, in fact the demand in the route increased).

Does the model behind AM consider any "customer retention/fidelization"?

[MrOrange]

HotDrink, that's slightly wrong When you create a route, there will be a demand based on the airport sizes and, in a slight way, alliance flights in and out of the airports. That demand doesn't, AFAIK, change by changing the frequency of the route. All that will change is the supply. When you create a higher frequency route, thereby supplying passengers with more seats, simple economics will tell you you have to lower the prices in order to fill the supplied seats.

[giocal]

Thanks Mr Orange, but still I am not completely sure it should work this way.

The potential demand on a route can be segmented in different customer clusters, each one able to efford a different maximum price. Trying to extremely simplify, if the potential number of pax is 1000, let's say there are 3 clusters of customers:

- 50% of them will fly only if the ticket is cheaper than 150€
- 30% of them will fly only if the ticket is cheaper than 200€
- 20% of them will fly only if the ticket is cheaper than 300€

Of course I think this clusters don't exist, but the should be represented by a continuous function.

So, keeping in mind our fake clusters, in a monopolystic market your price should set the demand served: for example, setting my tickets at 350€ I will have non customers, lowering them to a price between 200 and 300€ I will espect to have 200 potential customers.

But the real situation isn't monopolystic. There are three companies:

- company A & company B price their tickets 160€
- company C (me) prices its tickets 140€ (numbers are examples).

Of course not all the customers of company C can efford a ticket by companies A or B, but not vice-versa!

Since company C uses a small aircraft, it offers only a limited number of seats, which are completely loaded (LF=100%).

When increasing the frequency of flights (that's to say: increasing the seats available at 140€), what I espect is to shift some customers from A&B to C.


Thanks in advance for any other answer, I'm really interested in undestanding if my Economics knowledge lacks something!

Bye,
Gio

[djedradovan]

Sorry to interrupt, but I don't really see what you're saying here. For me, the situation is perfectly correct.

The number of passengers is a constant. Let's represent it by the letter c.
Also, let's represent the number of available seats in all companies before you increased the frequency by a and the number of available seats in all companies after you increased the frequency by A.

Now, we have A>a, which is obvious. Therefore, 1/a>1/A (a and A are positive numbers). Let's multiply it by c and we have c/a>c/A. c/a and c/A are the number of passengers per available seat before and after the change, respectively.
Obviously, they are proportionate with the interest in each available seat (let's use letters i and I). Therefore, i>I. Since the optimal price (let's use p and P) is proportionate to the interest in each available seat, p>P is also valid. Hence, the optimal price before you increased the frequency was bigger than after you increased the frequency. Hence, you needed to lower your price.

Hope this helps!

[MrOrange]

The cost of the tickets is not so much a factor in calculating the LF when all routes of different airlines are at 100% (or any other %), i.e. virtual passengers don't  currently choose airlines based on ticket price. If you manage to get a 100% LF with a 5 frequency route at €50, another airline can have a one frequency route at €200 and still get 100% LF. Passengers just don't care.

[giocal]

i.e. virtual passengers don't currently choose airlines based on ticket price

Really? Ok, this explains everything... inluding my "strange competition model" bug type...

If you manage to get a 100% LF with a 5 frequency route at €50, another airline can have a one frequency route at €200 and still get 100% LF.

Ok, but... what if the frequency goes to 6? None of those travelling at 200€ wants to save 150€? In my opinion, this model only considers the possibility to expand the market share adding the lowest targed of customers (those who still can not efford a ticket), but doesn't consider the possibility to "charm" those paying more.

Thanke for you answers... I'm just sad for the two routes "killed" in order to increase my flights to GVA

Bye

[Hot Drink]

None of those travelling at 200€ wants to save 150€?

virtual passengers don't currently choose airlines based on ticket price

so when u reduce the price to €1, a competition with €200 may still have a 100%LF.

[MrOrange]

For extensive essays on this, there's a thread in General Chat about multiple frequencies and how everybody thinks they are irritating :wink:

[Hot Drink]

For extensive essays on this, there's a thread in General Chat about multiple frequencies and how everybody thinks they are irritating :wink:

i think one of the thread u means may be this
http://stephenm.org/forum/viewtopic.php?t=5113

[zkvac]

Yeah you probably shouldn't have to worry about that anyway, only EVER do 1 freq routes.