Page 629 - Microeconomics, Fourth Edition

c14gametheoryandstrategicbehavior.qxd 8/6/10 8:22 AM Page 603

PROBLEMS 603
All traffic on the network flows between A and C, Sky’s profit. Suppose Ajax charges P AB 100 and Sky
using B only as a point to interconnect with the other air- charges P BC 90. Determine the profit for each of the
line. (In other words, no traffic originates or terminates two carriers, and enter your calculation in the table.
at B.) The demand for passenger service between A and b) Currently, Ajax and Sky are not allowed to coordinate
C is Q AC 220 P AC , where Q is the number of units prices. They must act noncooperatively when setting
of passenger traffic demanded when P AC , the total airfare their fares. Using the preceding table, find the Nash
between A and C, is P AB P BC . equilibrium fares. Explain how you arrived at your
answer.
A B C c) The two airlines have been lobbying antitrust author-
ities to allow them to merge, an act that would enable
Ajax Air: Air fare = P AB Sky Air: Air fare = P BC them to price jointly as a monopolist. The merged airline
Cost: C AB = 20Q AB Cost: C BC = 20Q BC would still stop at B for refueling. The cost and demand
curves would not change if the carriers merged. Use the
a) The preceding table shows the profits for each carrier for table to determine what price the merged entity would
various combinations of airfares. The upper left number in charge for a trip between A and C, and explain your rea-
a cell shows Ajax’s profit; the lower right number shows soning clearly.