JetBlue and Delta are the only two major airlines with regularly scheduled service between New York and Nantucket. There are 900 potential passengers every week, each of whom is willing to pay up to $400 for a ticket. Since the two airlines provide an essentially identical (bad) service, customers simply prefer to buy from the cheaper one. (If they charge the same price, then they will split the market equally.) Each airline can transport at most 1200 passengers each week. You can safely assume that each airline spends literal peanuts (i.e., zero) serving passengers; however, each passenger displaces air cargo that is worth $160 in profits to the carriers. Suppose that each airline takes a short-run perspective and only wants to maximize each week's profits, and that neither one would consider shutting down the route in the foreseeable future. (a) What is the appropriate economic model to study price competition in this market? (b) If you use Nash equilibrium to make a prediction, what price is each airline going to charge? Explain your reasoning. (c) Give two possible practical means by which the airlines could earn more than predicted in (b). (d) If construction-related traffic congestion at LaGuardia airport makes Delta's cargo business less attractive to shippers while JetBlue's JFK-based operations remain unaffected, how will your prediction in (b) change? Explain
JetBlue and Delta are the only two major airlines with regularly scheduled service between New York and Nantucket. There are 900 potential passengers every week, each of whom is willing to pay up to $400 for a ticket. Since the two airlines provide an essentially identical (bad) service, customers simply prefer to buy from the cheaper one. (If they charge the same price, then they will split the market equally.)
Each airline can transport at most 1200 passengers each week. You can safely assume that each airline spends literal peanuts (i.e., zero) serving passengers; however, each passenger displaces air cargo that is worth $160 in profits to the carriers. Suppose that each airline takes a short-run perspective and only wants to maximize each week's profits, and that neither one would consider shutting down the route in the foreseeable future.
(a) What is the appropriate economic model to study price competition in this market?
(b) If you use Nash equilibrium to make a prediction, what price is each airline going to charge? Explain your reasoning.
(c) Give two possible practical means by which the airlines could earn more than predicted in (b).
(d) If construction-related traffic congestion at LaGuardia airport makes Delta's cargo business less attractive to shippers while JetBlue's JFK-based operations remain unaffected, how will your prediction in (b) change? Explain.
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