Final answer:
The phenomenon of another major airline entering the marketplace and affecting competitor profits relates to the threat of new entrants in Porter's Five Forces model.
It highlights the role of barriers to entry and the potential impact of new firms on the existing market competition and profitability.
Step-by-step explanation:
When considering how the entry of another major airline into the marketplace can affect competitor profits, we are discussing the threat of new entrants, which is one of the aspects of the Porter's Five Forces model.
This concept relates to how difficult it is for new firms to enter an industry and the potential impact on existing firms' market power and profits.
If one firm in the market is making substantial profits, this can attract new competitors to enter the market, potentially bringing new capabilities, a desire to gain market share, and additional resources.
As a result, established firms might be compelled to engage in price wars or increase their advertising spend, leading to reduced profitability and a shift in market dynamics.
For instance, consider a large airline that controls most of the flights between two cities; if a new, small start-up decides to compete on the same route, the incumbent may engage in aggressive pricing strategies to undercut the newcomer, potentially driving them out of the market. After which, the incumbent can raise prices again.
This dynamic underscores the importance of barriers to entry and the influence of potential new competitors on the existing market structure.