In a competitive market, how do low-cost carriers typically impact other airlines?

• A. They have no significant effect on the pricing strategies of other airlines.
• B. They increase price competition, often leading other airlines to lower their fares.
• C. They force other airlines to exit the market immediately.
• D. They cause other airlines to raise their prices to differentiate their services.

Answer: (B)

Verified step by step guidance

1. Understand the nature of a competitive market where multiple firms (airlines) compete primarily on price and service.
2. Recognize that low-cost carriers typically have lower operating costs, allowing them to offer lower fares than traditional airlines.
3. Analyze how the presence of low-cost carriers affects the pricing strategies of other airlines: to remain competitive, other airlines often lower their prices to attract or retain customers.
4. Consider the concept of price competition, where firms reduce prices to gain market share, which can lead to an overall decrease in market prices.
5. Conclude that low-cost carriers increase price competition, prompting other airlines to lower their fares rather than raising prices or exiting immediately.