Which of the following scenarios demonstrates the threat of substitutes faced by airlines?

• A. An airline launches a frequent flyer program to reward loyal customers.
• B. A new high-speed rail line is introduced between major cities, attracting travelers who previously flew.
• C. Airlines reduce ticket prices to compete with other airlines.
• D. Airport security measures are increased, causing longer wait times for passengers.

Answer: (B)

Verified step by step guidance

1. Understand the concept of the 'threat of substitutes' in microeconomics: it refers to the risk that customers may switch to alternative products or services that fulfill the same need, potentially reducing demand for the original product.
2. Identify the product or service in question, which here is air travel provided by airlines.
3. Analyze each scenario to see if it involves an alternative mode of transportation that could replace air travel:
4. - Frequent flyer programs encourage loyalty but do not introduce a substitute product.
5. - A new high-speed rail line offers an alternative mode of travel between cities, which can replace air travel, thus representing a substitute.
6. - Airlines reducing ticket prices is competition within the same product category, not a substitute threat.
7. - Increased airport security affects the experience but does not introduce a substitute product.