It has to be answered using Game Theory knowledge like: Prisoner's game, Coordination game, Nash Equilibrium... But only talking about it, calculations are not needed.

You have been hired as a consultant for the Competition and Consumer Commission. You are working in the division that is responsible for regulation of the airline industry. Your manager has been informed that Qantas (Q) and Japan Airlines (JA) are planning to apply for an authorization of a joint business agreement to fully coordinate their air passenger and cargo operations between Australia and Japan. Your manager asks you to prepare a report that answers questions 1-5 below.

1. For simplicity, assume that there are only two airline companies that fly between Australia and Japan, Q and JA. Initially assume that both firms are identical in terms of their production costs. If the two firms can cooperate, what should they do to maximise industry profits?

2. How does your answer to (1) change if the two firms have different costs of production?

3. As an ACCC consultant, how would you view the proposed cooperation between the Q and JA?

4.Now assume that each airline is free to set weekly number of flights between two countries, but each firm can communicate (via the business press) what they plan to do first. Using an economic model, show that it might be difficult to sustain a cooperative (high profit) outcome. (Hint: what firms communicate may not be credible.)

5. This question requires you to think more broadly than the airline industry, given that in Australia, firms are not allowed to explicitly coordinate their prices. Are there other ways in which two large firms can try to avoid being caught in a competitive outcome? Briefly, discuss the relevance of these alternative strategies to airline industry.