(Sales mix)

India’s domestic airlines have battled antiquated airports, high fuel prices and government rules that force them to fly unprofitable routes.

In 1999, they were wounding one another with a price war.

Hints of the looming dogfight emerged even before the start of India’s traditionally slack June-to-September travel season. Sahara Airlines, the smallest of three major domestic carriers, slashed rupee fares between 10% and 20% on some major routes in March.

At first, larger competitors Jet Airways and Indian Airlines were unruffled.

But they followed suit in June, cutting fares and unveiling incentives to attract travelers, including hotel discounts and the chance to win trips abroad. Air India, the state-owned international carrier, joined the fray, with bargain fares on some domestic routes that made flying cheaper than taking the train.

SOURCE: Adapted from Rasul Bailay, “Air-Fare War in India Lowers Sky-High Prices—Nation’s Domestic Carriers Fight to Lure Travelers Away From Busy Trains,” The Wall Street Journal (August 3, 1999), p. B11D.

a. Change in pricing is only one tool companies may wield to change the volume of their sales. Discuss why airlines tend to use this tool more so than other tools.

b. Why, in the airline industry as well as other industries, is it necessary to carefully consider the response of competitors before using price changes to stimulate demand for services?

c. How is the circumstance with the Indian air carriers similar to a special pricing decision?