16. In analysing switching by customers between airlines the following data has

Question

16. In analysing switching by customers between airlines the following data has been obtained by British Airways (BA): Next Flight By BACompetition Last Flight By BA 0.7369 0.2651 Competition 0.1751 0.8240 For example, if the last flight by a customer is with BA the probability that their next flight is with BA is 0.7369. The probability that a customer whose last flight was with the competition, but their next flight is with BA, is 0.1751 Currently BA have 40% of the airline market, and we're assuming only two firms exist- BA, and the competition. What is the forecast of BA's share of the market after three years? [6 marks]

Explanation / Answer

Current market share of BA = 0.4 and market share of competition = 1-0.4 = 0.6

Tranisition probability matrix:

Year 0 : (BA competition) = (0.4 ,0.6)

Year 1: (0.4*0.7369+0.6*0.1751 , 0.4*0.2651+0.6*0.8240) = (0.39982 ,0.60044)

Year 2 : (0.3998*0.7369+0.6004*0.1751 , 0.3998*0.2651+0.6004*0.8240) = (0.399764,0.600755)

Year 3 : (0.399779, 0.6009)

So BA will have 39.98% share

BA Competition BA 0.7369 0.2651 Competition 0.1751 0.8240

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