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Competitive Pricing Strategies of Low Cost Airlines in the Perspective of Game Theory

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Competitive Pricing Strategies of Low Cost Airlines in the Perspective of Game Theory
2011 International Conference on Sociality and Economics Development
IPEDR vol.10 (2011) © (2011) IACSIT Press, Singapore

Competitive Pricing Strategies of Low Cost Airlines in the Perspective of Game theory
Lim Seng Poh+ and Mohd. Ghazali bin Mohayidin
Open University Malaysia

Abstract. Price is the weapon of choice for many low cost airlines in the competition for market share. Regional low cost airlines’ pricing strategy for market stimulation is issuing free tickets and competing in ticket prices setting. It has been assumed as an effective strategy in influencing customers’ purchasing decision. This study has documented the differences in price setting dynamics across low cost airlines operating on one of the biggest regional market and six domestic routes. A total sample of 7883 fare quotes for nonstop travel from Kuala Lumpur to Singapore and 6 domestic routes have been examined. The employment of
Granger Causality Test attempts to mathematically capture the competitive behaviour in price setting. The data evidence revealed the reality of price competitiveness among the low cost airlines and game theory suggests that price cooperative should be implemented by low cost airlines for long term sustainability.
Keywords: Low cost airlines, Pricing Strategies, Game theory

1. Introduction
Business is a high staked game. Branderburger (1995) notes that essence of the business success lies on playing the right game. In the context of oligopoly and duopoly low cost airlines market structure, an airline company that lower the price of its tickets will affect not only its own profitability but also the profitability of its competitors since a lower price will influence consumers’ decision making. Regional low cost

airlines’ pricing strategy for market stimulation is issuing free tickets and competing in ticket prices setting. It has been assumed as an effective strategy in influencing customers’ purchasing decision, nevertheless, predatory price setting implied


References: [1] Chan Choi and Sharan Jagpal ( 2004). Duopoly pricing under risk aversion and parameter uncertainty. Journal of Product and Brand management, vol 13 N.5 358[2] Brandenburger, A, Barry J Nalebuff (1995). The right game : use game theory to shape strategy. Harvard Business Review Article. [3] Meghan Busse (2002). Firm financial condition and airline price war. RAND Journal of Economic vol.33(2).pp 298-318. [4] John Von Neuman and Oskar Morgenstern (1944) Theory of games and economic behavour [5] Porter, M.E (2008) The five competitive forces that shape strategy. Harvard Business Review. Jan 08 vol 86 No 1 81,86 494
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