Giant Airlines operates out of three main “hub” airports in the United States. Recently Mosquito Airlines began operating a flight from Reno,Nevada, into Giant’s Metropolis hub for $190. Giant Airlines offers a price of $425 for the same route. The management of Giant is not happy about Mosquito invading its turf. In fact, Giant has driven off nearly every other competing airline from its hub, so that today 90% of flights into and out of Metropolis are Giant Airline flights. Mosquito is able to offer a lower fare because its pilots are paid less, it uses older planes, and it has lower overhead costs. Mosquito has been in business for only 6 months, and it services only two other cities. It expects the Metropolis route to be its most profitable.
Giant estimates that it would have to charge $210 just to break even on this flight. It estimates that Mosquito can break even at a price of $160. Within one day of Mosquito’s entry into the market, Giant dropped its price to $140, whereupon Mosquito matched its price. They both maintained this are for a period of 9 months, until Mosquito went out of business. As soon as Mosquito went out of business, Giant raised its fare back to $425.
Answer each of the following questions.
(a) Who are the stakeholders in this case?
(b) What are some of the reasons why Mosquito’s breakeven-point is lower than that of Giant?
(c) What are the likely reasons why Giant was able to offer this price for this period of time, while Mosquito couldn’t?
(d) What are some of the possible courses of action available to Mosquito in this situation?
(e) Do you think that this kind of pricing activity is ethical? What are the implications for the stakeholders in this situation?