Question
Bordeaux route under threat of entry Knowing the growing importance of Bordeaux's corporate sector and the city's growing influence in hosting expositions and conferences, we
Bordeaux route under threat of entry
Knowing the growing importance of Bordeaux's corporate sector and the city's growing
influence in hosting expositions and conferences, we were the first airline to offer a direct
flight from Dubai to Bordeaux. Having a monopoly over the direct route, we ha
ve
enjoyed strong profits to date. As a monopoly, our inverse demand for the flight route is
P=3,000-
5Q and our cost associated w
ith the flight is C(Q)=150,000+100Q
. We are
curren
tly charging $1
,400 on average for a seat in our main cabin and we typically sell
around 320 tickets per flight. Profits gene
rated per flight exceed $265
,000.
For your first task, please check if we are currently optimizing our monopoly price for
profits
at $1,400.
I wonder if there is more willingness to pay than we are extractin
g.
We are not the only ones focusing on profits, our competitors have taken notice and are
potentially planning entry. Specifically we think that Etihad Airways will make a play on
a similar route from Abu Dhabi
to Bordeaux. If Etihad enters, we will have
to change our
strategy in pricing under the Cournot Duopoly. To avoid this route competition we have
inquired about purchasing the route rights before our competitors, but it comes wit
h a
sizeable fee of $200,000 per flight
. Let me know if you think the c
ost is worth it to
protect our monopoly on the route.
Our accounting department tells
me that Etihad's costs are predictably in line with our
costs, so our best estimate is to assume that they have the same cost structure as ours.
Furthermore, the underlying daily market demand that we are enjoying today as the sole
provider will not be al
tered once Etihad enters
, so keep the given inverse demand
function constant in your analysis of the Cournot competition as well.
Give me a best estimate of how much our profits will suffer if Etihad enters the market,
and that would give me a good idea of whether or not buying the route rights from Abu
Dhabi would be worth it.
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