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.