Indonesian Airline Price Floors

After years of Indonesian Airlines suffering from various accidents, the Jakarta Post came out with an article describing the Indonesian government’s recent debate to change price floors within their airline industries. But what do price floors have to do with the safety of Indonesian Airlines?

By installing price floors, governments make it illegal for products to be sold underneath the regulations. Price floors would create competition between airlines to offer passengers the best quality; by creating price floors within their airline system, Indonesia could be insuring safer and high quality carriers, resulting in less accidents. The current floor calls that airline fees must be within 40% of the already established price ceiling, but the CEO of Air Asia is calling for a 30% reduction of that minimum price.

Some Indonesian economists still argue that accidents will continue to occur despite the price floor, and that more extensive measures must be taken. But whether safety is completely insured or not, the floors would still prevent “predatory pricing” from the lower-end airlines. Regulating prices doesn’t always result in killing healthy competition, but the industry will continue to make their argument until the government makes a final decision.

 

4 Comments »

  1. edwardsg Said,

    October 23, 2016 @ 6:36 pm

    This is a really interesting article, and a very well-written summary, but you fail to mention Damuri’s comments about trading a price floor for nation-wide safety regulations, and how this suggestion applies to your analysis of the conceived trade-off between price and safety.

  2. Nicky Tynan Said,

    November 2, 2016 @ 4:03 pm

    This is a good summary and explanation of how Indonesia is using a price floor as an indirect way to improve safety. The assumption is that non-price competition will take the form of improved safety rather than better in-flight services. Direct regulation of safety may be a lower cost way of improving safety without creating other distortions in the airline market.

  3. zhengx Said,

    November 18, 2016 @ 2:19 pm

    This is a good explanation of how Indonesia use price floor to encourage airlines’ safety. I’m really interested in your saying, “by installing price floors, governments make it illegal for products to be sold underneath the regulations.” This is a really good summary of definition. It reminds me of the lecture given by James Saunoris in my first year seminar last week. he talked about his on-going research paper which is about shadow economy, a market for illegal trades. I’m curious about whether there would exist a shadow economy of airlines in Indonesia where low-price tickets are still provided for consumers.

  4. cortij Said,

    December 8, 2016 @ 4:14 am

    While I agree that price floors will prevent airliners from competing with one another by preventing them from lowering their prices too much, I do not believe that a price floor will lead to greater improvements in aircraft safety. It is quite possible that airlines will keep their prices at the minimum level and stop short of making their planes safer. I would agree with the suggestion that Damuri makes that instead of price floors, nation-wide safety regulations should be implemented instead. I think that a price floor will prevent airlines from getting rid of safety measures in order to cut costs, but that does not mean that it will encourage the creation of additional measures that reach a sufficient level of safety.

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