American Airlines (A) and the Hawaiian Airlines (H) are two large airline in US market. The market has Market Demand:

QM = 160 ? 3P where QM denotes the number of passengers of the total market per day.

The American Airlines operates with a Fixed Cost of $2500 per day no matter the plane fies or not and Marginal Cost of $8 per passengers.

Therefore the daily Total Cost for American Airlines is

TCA = 8QA + 2500

While the Hawaiian Airlines operates with a lower Fixed Cost of $1800 per day no matter the plane

ies or not but higher Marginal Cost of $15

per passengers. Therefore the daily Total Cost for Hawaiian Airlines is TCH = 12QH + 1800

a. Derive the Total Revenue (TR), Marginal Revenue (MR), Average Revenue (AR), Average Cost (AC) and the Prot () for each air-lines.

b. Plot AC, MR, MC in one graph for each airlines.

Scenario 1 (for Part c, d, e, f):

Suppose both airlines are making their decision - competing in Quantity simultaneously, i.e. they are in Cournot Competition.

Hint: We don't have a symmetric case here, so the share of the market (quantity supplied for both airlines should be different).

c. Setup the Prot Maximization Problem for both airlines. What is the Reaction Curve (Best Response Function) for each airlines?

d. Find the Nash Equilibrium in this Cournot Competition, i.e. find the optimal quantity bundle (QCA;QCH).

e. What are the Total passengers carried (QC), Profit for each airlines (CA and CH), and the Market Price for the air ticket (PC) in this Cournot Competition.

f. What is the optimal quantity bundle (Q*A;Q*H) if both airlines collude with each other (as if they become one company - the Monopolist in the market)? What are the Total passengers carried, Profit, and Market Price in this case?

Scenario 2 (for Part g, h, i):

The American Airlines is the leading airlines, so it will make the output decision first then Hawaiian Airlines follows, i.e. they are in Stackelberg Competition.

g. Setup the Prot Maximization Problem for each airlines. What is the Reaction Curve (Best Response Function) for each airlines?

h. Find the Equilibrium in this Stackelberg Competition, i.e. find the optimal output bundle (QSA;QSH).

i. What are the Total passengers carried (QS), Profit for each airlines (SA and SH), and the Market Price for the air ticket (PS) in this Stackelberg Competition.

Scenario 3 (for Part j, k, l):

Suppose now American Airlines and Hawaiian Airlines are competing in Price, i.e. they are in Betrand Competition.

j. What is the Best Response Function for each airlines?

k. Find the Equilibrium in this Betrand Competition, i.e. find the optimal price bundle (PBA ; PBH ).

l. What are the Total passengers carried (QB) and Profit for each airlines (BA and BH) in this Betrand Competition.

m. Compare your results for all three scenarios, including the collusion cases.