Oligopoly Behaviour in the Trans-Tasman Air Travel Market: TheCase of Kiwi International

Abstract

The duopoly of Air New Zealand and Qantas serving the trans-Tasman air travel market was disturbed in August 1995 by the entry of a small former charter airline, Kiwi International, based in Hamilton, NZ. Kiwi exited into liquidation in September 1996. The intervening thirteen months saw the entry of a 'fighting brand' no-frills airline, Freedom Air, set up by Air New Zealand to compete directly with Kiwi, and then a general price war initiated by Qantas, which directly preceded Kiwi_s demise. Was the behaviour of the incumbent duopolists 'predatory', in the sense of being designed to drive the new entrant from the market? Standard tests based on comparisons of price and costs are inconclusive. The innovation of this paper is to model the oligopolistic behaviour of the firms before and after entry. It is found that the duopolists became substantially more 'competitive' during the price war period, consistent with an interpretation of intent to predate.