In the late 1990’s, Vanguard Airlines operated as a low-cost carrier, offering l

Question

In the late 1990’s, Vanguard Airlines operated as a low-cost carrier, offering low prices and limited services, out of Kansas City, Missouri. Not long after its inception, Vanguard began offering a significant number of flights based out of Midway International Airport in Chicago, Illinois as well. When Vanguard expanded to Midway, incumbent airlines, such as Delta, quickly responded to its low fares by offering many competing flights at comparably low prices. The intense price competition ultimately caused Vanguard to exit Midway in 2000 and file for bankruptcy in 2002. At varying points in time, the airline industry has been described as a contestable market.

True or False?: The example of Vanguard supports the characterization of the airline industry as a contestable market.

Explanation / Answer

The answer is false.

Contestable markets are actually the markets with no entry or exit barriers. In the given example Vanguard is characterized as the one with bankruptacy at the end after getting to exit. This actually gets to reveal the fact that there are a lot of exit barriers for the airline industry and therefore it can be concluded that the barriers actually restrict the entries which doesn't qualify the airlines as a contestable market.

Therefore the statement is false.

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