Economics Commentary Essay

The phrase concerns the scathe war in the airline business in China. Air companies sell tickets at demoralize than cost bell to drive let on competitors. The Civil Aviation Administration of China (CAAC) pauperisms to prevent this and leave behind set a price floor for seats on 699 flights. In this commentary I allow explain the situation and discuss the consequences of this issue.Air companies try to attract the necessary numbers of passengers to stop their r push throughes from organism canceled by the CAAC. Offering discounts is one of the ways to attract mess to buy air tickets. In this case, discounts of 70 to 80 percents had been offered to consumers over the last few months, while a regulation made by the NDRC and CAAC in 2004 states that airlines should not sell tickets at less than 45 percent of the nominal price. Although this regulation, China Eastern move the price war by still giving these huge discounts which were meant to provoke counterattacks from other air lines. Firms usually want to determine prices to maximize profits and one option is predatory set. Predatory pricing means that firms dress prices below costs to drive out competitors. As soon as firms have driven out competitors, obtained a bigger market share, they raise the prices again.Predatory pricing makes the industry more concentrated, because there a fewer firms in the market. With other words, the market becomes less competitive and more monopolistic. The CAAC tries to prevent this in ball club to keep the air business competitive. Options are price floors, as allow for be explained later. However, travelers are against the idea, as price wars are profitable for them in the hapless run. They can buy relatively cheap tickets now. though the tickets get out be more expensive in future, in the long run. This happens when the firms have driven out their competitors and have raised their prices again. Then producers willing charge higher prices than the normal price and the consumers would therefore be worse off.Although this predatory pricing , also rumors about government intervention made consumers already unhappy. roughly insiders have implied that China Eastern used funds injected by the government to subsidize its losses on ticket sales. The reaction of the CAAC was that the government had injected several billion yuan into China Eastern to maintain its mundane operations, but not so it could cut ticket prices.The reaction from the travelers on the implementation of a price floor was also negative. A price floor means that a government introduce a minimum price that can be charged for a product. With an implementation of a price floor, the supplicate will decrease from Q0 to Qd and the price will increase from P0 to Pmin. The firms which are still in the industry will now charge higher prices at lower outputs. They pay more and get less.If the CAAC decides to implement this price floor it causes that there will be a excess supply, the are a Pmin-(Qd-Qs) . The costs can be higher than the profits and therefore producers will leave the industry. This will lead to a shift in supply and to less excess supply in the long run as shown in estimate 2.Secondly there is a problem with unemployment. By implementing a price floor, unemployment will occur. This is because the supply will shift to left in the long run. There are fewer suppliers and therefore people will get unemployed. People who were working in the area Qd-Q0 will lose their jobs. On the other hand, people who are working in the area 0-Qd will keep their jobs and will gain more. Consumers are ostensibly not happy with this and some people reacted with statements as, We dont want to pay extra adept to fund some senior managers salary, as mentioned in the article.Predatory pricing is a difficult task to prevent, since price floors do not benefit consumers neither in the short run nor in the long run. The CAAC probably needs to find other regulations and restrict ions manners to prevent this vixenish competition.