Business Economics 1. In the airline industry, airline companies usually share m

Question

Business Economics

1. In the airline industry, airline companies usually share many common flying routes. For instance, in 1998 Northwestern and Delta appeared jointly in 323 common routes. Some empirical studies found that the more common flying routes between the airline companies, the higher are the average airfares over these routes. Please comment and explain this finding in detail.

2. Suppose that a car dealer has a local monopoly in selling Honda cars. It pays the wholesale price w to the monopolist Honda for each car that it sells ,and charges each consumer the retail price p. The demand function in the retial market is given by p=360-q. The martginal cost of Volvo is 40.

A. Referring to question 2, now suppose that Honda has two dealers who compete in the one-period Bertrand competition (short term) in the retail market. All the other condiitons remain the same as before. Find the new Nash Equilibrium in this game.

B. Referrign to question 2, If these two retailers compete with each other in the long run, an infinetely repeated Bertrand competition, with a discount rate of 0.8. All the other conditions remain the same as before. What is the new Nash equilibirium?

Explanation / Answer

Q1. It has been provided that some empirical studies had found that the more common are the flying routes between the airlines companies, the higher are the average airfares over these routes.

The reason behind this outcome is that when airline companies fly on common flying routes they compete with each other to attract more air travelers towards themselves.

This competition can take form of price competition or non-price competition. High operating cost of airlines generally makes the price competition unsustainable so airlines generally indulge in non-price competition.

These non-price competition avenues include advertising, offer of various amenities during travel etc.

This increases the operating cost of airlines flying on common routes which translates into higher average airfares.

So, being in oligopolistic industry, airline companies rely more on non-price competition while competing for passengers on common flying routes. This considerably increases their cost of operation which translates into higher average airfares.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.