In this section, we discuss the various theoretical underpinning and empirical arguments surrounding pricing behaviour and drivers of competition in the aviation industry.
Theoretical framework
The game theory is adopted to analyse competition between Arik Air and Aero Contractors. One frequently cited example of descriptive use of game theory is the prisoner’s dilemma game [3, 6,7,8,9,10]. The prisoner’s dilemma game is one of the classic examples of non-cooperative game in static form. In this game, there are two players and each player have one turn, and the turns are simultaneous. The essential elements of simultaneous play are that each player moves without knowing the move of the other. Each player has two possible strategies—to maintain innocence or to cravenly confess. If both players maintain innocence, they will increase their payoffs. However, if they are induced with a promise of few years in jail by confessing, then the payoffs might be reduced. The implication of prisoner’s dilemma to firms in competitive industry is to maintain current strategy that gives each player maximum payoffs.
In view of this, in any game of analysis, linear programming has been found mathematically to provide optimal solution to the players (Afrousheh et al. [11]; Cong et al. [12]; Zimmermann et al. [13]; Andrews et al. [14]), historically, ideas of linear programming inspire many basic concepts of optimisation theory such as duality, decomposition and importance of convexity and its generalisations [15, 16]. In addition, it is useful in modelling issues of planning, routing, scheduling, allocation and design. An evaluation of 500 largest firms in the world showed that 85% of them have used linear programming [11, 17,18,19,20]. It is in the light of this that this current study utilised linear programming algorithm in finding the optimal strategy and the payoffs emanating from such optimal strategy for the two selected firms in the Nigerian domestic aviation sector.
Empirical literature
Early literature has made reasonable efforts to build different models that explain nature, strategies, and behaviour of firms to cope with their environment. For instance, Bell [21] once argued that a firm’s managerial asset is a key driver of competition in any industry. Chen et al. [22] in their study postulated that market competition and internal governance are critical for assessing competition in Taiwan. Sanjo [23] suggested that the capital based on a firm and the business location is critical for competition. Further on competition, some studies claimed that the degree of the firm’s orientation is crucial in surviving the dynamic competitiveness in the face of uncertain and highly challenging business environment [24,25,26,27].
Recent studies attributed consistent failure and poor performance of businesses across the globe to poor management and lack of organisational culture (Chen et al. [28]; Yang and Dixon [29]). Chen et al. [28] reasoned that some firms fail to contest their position in their respective industry due to poor management capacity and other organisational factors. Luo et al. [30] observed that organisational culture and the attitude of management to compete are simultaneous factors that could juxtapose the level of success or failure that a firm attains. Some scholars called attention to how long-term development and strategic management drive competition among firms [31,32,33,34]. Wang et al. [31] contend that organisations with knowledge sharing skills and manager’s training capabilities are more likely to survive the pressure of competition. Dorn et al. [35] promoted the stance that the structure, strategy and policy operated by an organisation are some of the predetermined factors that keep shaping and reshaping the nature of the organisation’s behaviour towards competition. Further on the debate of organisation and motivators of competition, other scholars argued for interpersonal relationship and corporate identity as major movers of firm’s competition, especially in the aviation industry [36,37,38,39]. Ceptureanu et al. [40] concluded in their work that competitive performance has significant implication on the overall benefits and outcome of the organisation’s performance/sustainability.
In German, Barry and Nienhueser [41] examined the low-cost airline industry and reported that competitive pressure stemming from European aviation demand for low-cost travelling is major driver of competition in the German aviation industry.
In the USA, Velu [42] examined the level of dominance in firms and drivers of competition. He argued that the degree of innovation experienced within the system was major contending factor that determined competition in the US economy.
In the Polish economy, Klimas [43] identified the gap in competition in the Polish aviation industry and suggested that organisational culture and orientation are key drivers of competition in the industry.
In India, Singh [44] measured the competitive service quality performance of aviation firms and provided evidence that traveller’s rate was a major driver of competition among firms in the Indian aviation industry. The author further stressed that the aviation industry in India has undergone rapid transformation with the liberalisation of the sector leading to increase in cost, tight profit margins, and increasing competition among airlines. Thus, an airline’s success depends heavily on its ability to retain old customers and attract new ones.
In Korea, Park et al. [45] investigated whether and how service quality and corporate social responsibility (CSR) significantly affect behavioural intention of customers to use or not to use an airline, through customer satisfaction survey among South Korean airline service providers. They explored an integrated research model and provided evidence that economic, social, and environmental responsibilities, as well as in-flight service quality, significantly determined customers’ satisfaction. Again, they concluded there were notable connections between customer satisfaction and behavioural intention to use.
Adler and Hanany [46] compared aviation markets under conditions of competition, code sharing contracts and anti-trust immune alliances, assuming that demand for flights depends on both fares and the level of frequency offered. Using a hybrid competitive/cooperative game theoretic framework, we showed that the stronger the inter-airline agreement on overlapping routes, the higher the producer surplus. We also demonstrated that under asymmetric and uncertain demand, code sharing on parallel links might be preferable to competitive outcomes for multiple consumer types.
Alderighi et al. [47] examined the price setting behaviour of full-service airlines in European passage aviation market. The authors developed a model of airline competition, which accommodates various market structures and provided evidence that competition in the aviation market in Europe was measured by price behaviour among the aviation firms.
In all the paper reviewed above, a crucial sustained assumption is that competition remains the paramount for firm to survive their business environment. However, it is unclear whether increase or decrease in competition can improve customer patronage and reassure greater output. In particular, majority of the studies seems silent on the nature and pattern of competition that can be used in the aviation industry. For instance, some studies claimed that uncertainty in demand can make it impossible for firm to compete [46]. Other studies argued that price setting behaviour are drivers of competition [47]. Thus, the lack of consensus among scholars on whether pricing behaviour or demand uncertainty are the drivers of competition motivate further re-examination of this link. One common feature among these studies, however, is the heavy reliance on the game theoretical approach. The combination of game theory and linear programming were used to aid the analysis of this present study too.