1. The total operating revenues of Trans Jakarta (Public Transportation Authority) are $100 million while its total operating cost are $120 million. The price of a ride is $1, and the price elasticity demand for public transportation has been estimated to be -0,4. By Law, Trans Jakarta must take steps to eliminate its operating deficit.

a. What pricing policy should Trans Jakarta adopt? Why?

b. What Price per ride must Trans Jakarta charge to eliminate

the deficit if it can not

reduce cost?

2. Suppose Garuda Airlines and Lion Airlines were competing for

business on the

Jakarta to Medan route during the off season. To lure travelers,

they were offering low

fares. The question is how much to lower fares. Both Airlines

were considering a deep

reduction to a fare of $400 round trip or a moderate one to

$600. Suppose costs are such that each $600 ticket produces profit of $400 and

each $400 ticket produces profit of $200.

Assume that studies of demand elasticity have determine that if both airline offer tickets for $600, they will attract 6,000 passengers per week (3000 for each airline) and each airline will make profit of $1.2 million per week ($400 dollar profit times 3,000 passengers). However, if both airlines offer deeply reduced fares of $400, they will attract 2,000 additional customers per week for a total of 8,000 (4,000 for each airline). While they will have more passengers, each ticket brings in less profit and total profit falls to $800,000 per week ($200 profit times 4,000 passengers). In this example, we can make some inferences about demand elasticity. With a price cut from $600 to $400, revenue fall from 3,6 million (6,000 passengers times $600) to $3,2 million (8,000 passengers times $400).

To keep things simple, we will ignore brand loyalty and assume that whichever airline offer the lowest fare gets all of the 8000 passengers. If Garuda Airlines offers the $400 fare, it will sell 8,000 tickets per week and make $200 profit each for a total of $1,6 million. Since Lion Airlines holds out for $600, it sell no tickets and makes no profit. Similarly, If Lion Airlines were to offer tickets for $400, it would make $1,6 million per week while Garuda Airlines would make zero.

a. Based on the story above, draw a pay off matrix by assuming these airlines are in oligopoly market.

b. Explain whether both airlines have a dominant strategy. Is there any Nash Equilibrium?

c. Suppose this competition is repeated every week and at one week Lion Airlines offer $600 fare, how will you ( as the pricing manager of Lion Airlines ) will react? Stay at low fares of $400 or follow suit to increase fare at $600. Explain.