Chapter 3 - Price Floors

http://www.chinadaily.com.cn/bizchina/2009-01/14/content_7394763.htm

Summary:
The Civil Aviation Administration of China (CAAC) is setting a floor price for the air tickets. The airlines that offer tickets at less than the minimum price that CAAC has set could have routes cancelled by CAAC as their names of airlines are on the list that CAAC publishes every 15 days. CAAC is setting the price floor to prevent a price war among the airlines since the domestic airlines have offered the discounts of 70-80 percent off to attract customers so their planes will not be cancelled by CAAC due to the emptiness of planes and that lead them to lost more than seven billion Yuan (approximately one billion in Canadian dollars). Also CAAC wants to prevent airlines counter-attacking airlines that are offering big discounts on flights since some airlines have asked ticket agents to stop selling tickets from certain airlines.

Connection:
According to chapter 3, price floor could be legislated if the equilibrium price is too low and making it illegal to sell the product at a price below the legal minimum. In this case, CAAC decided to set a price floor for airlines and set the punishment for airlines that sell tickets lower than the minimum price. For the airlines that aren’t selling at the equilibrium price or higher, their “illegal” routes could be cancelled and for the surplus, the routes that aren’t having a certain amount of customers will be cancelled too. The CAAC has basically balanced the disequilibrium situation.

Reflection:
My uncle loves to travel and he used to travel places when the economy is in recession so then he would have less expenditure. Over the last few months, he has travelled through at least fifteen places in China since the internal airlines of China were fighting against each other by their prices and customer services. The 70-80 percent lower prices attracted my uncle, yet the CAAC set the price floor for the airlines distract my uncle attention of places to travel from China to England and Paris. My uncle has commented on the price floor that CAAC has set, he agrees that CAAC is making the right decision as to prevent to keep losing money, but as a traveller, he thinks that travelling in China is not a good deal anymore whereas travelling in England and Paris are great deals since the exchange rate of Hong Kong dollars to pounds have been lowered due to the value of pound has dropped.