Question 1: Market Power in the Airline Industry SFO International Airport is one of United Airlines' major hubs. Suppose United Airlines is the only airline to operate fiights to New York City (NYC) out of SFO. Renan and Marshall just flew out of SFO on the same day, on the same United Airlines fight to NYC. They both bought economy class tickets and sat right next to each other. Renan wanted to visit the city and its popular attractions. He booked the flight a month in advance, for $100. Marshal, on the other hand, went there for a conference at Columbia University, to which he was invited just a week in advance, which was when he booked the fight for $400. a. Assuming that nothing changed in United's cost structure, what explains the difference in prices Renan and Marshall were charged for the same economy class service? As part of your answer, explain your assumptions about Marshall and Renar's price elasticities to fly on that specific day. b. Observing that United is making good profits on the SFO-NYC route. American Airlines decides to enter that market. Suppose that both firms have a constant marginal cost of $50 per seat, and no foxed costs. The market demand for this route is given by the inverse demand function: P=500Q, where Q=qa+q2, the sum of American and United seats. Each airline must decide whether to deploy their smaller Boeing 737, seating 100 pussengers, or a bigger Boeing 777, seating 200 passengers, for this route. For a given flight, the airlines make this decision simultaneously, without observing what the other airline has chosen. Demand is sufficient for the planes to always fyy full. 1. Suppose United flies the 100-seater small Boeing 737, and American fies the 200seater big Boeing 777 . Find the total market quantity and the resulting market price, using the inverse demand function. ii. Find the resulting profits for United and American Airlines. ii. Find the resulting profits for United and American Airlines. c. Now fill in the profit matrix below by repeating part (b) with different aircraft (quantity) choices for each airline. An example of how to fill it out is given below: d. Use the profit matrix to determine the equilibrium total number of seats (Q) offered by the airlines on the route. There may be more than one equilibrium point in the matrix. e. Suppose United and American were now to collude to maximize their combined profits. Which choice of plane would each one make? Explain how this affects the market price, and the equilibrium number of total seats offered to passengers, and without doing any calculations, whether deadweight loss increases or decreases relative to the equilibrium in (d). Recently, Spirit was in talks to merge with JetBlue or Frontier. Using the below market shares of US airlines, which of the two mergers (Spirit-JetBlue or Spirit-Frontier), if any, would regulators be likely to challenge? Justify your answer using the Herfindahl Hirschman Index (HHI). Question 1: Market Power in the Airline Industry SFO International Airport is one of United Airlines' major hubs. Suppose United Airlines is the only airline to operate fiights to New York City (NYC) out of SFO. Renan and Marshall just flew out of SFO on the same day, on the same United Airlines fight to NYC. They both bought economy class tickets and sat right next to each other. Renan wanted to visit the city and its popular attractions. He booked the flight a month in advance, for $100. Marshal, on the other hand, went there for a conference at Columbia University, to which he was invited just a week in advance, which was when he booked the fight for $400. a. Assuming that nothing changed in United's cost structure, what explains the difference in prices Renan and Marshall were charged for the same economy class service? As part of your answer, explain your assumptions about Marshall and Renar's price elasticities to fly on that specific day. b. Observing that United is making good profits on the SFO-NYC route. American Airlines decides to enter that market. Suppose that both firms have a constant marginal cost of $50 per seat, and no foxed costs. The market demand for this route is given by the inverse demand function: P=500Q, where Q=qa+q2, the sum of American and United seats. Each airline must decide whether to deploy their smaller Boeing 737, seating 100 pussengers, or a bigger Boeing 777, seating 200 passengers, for this route. For a given flight, the airlines make this decision simultaneously, without observing what the other airline has chosen. Demand is sufficient for the planes to always fyy full. 1. Suppose United flies the 100-seater small Boeing 737, and American fies the 200seater big Boeing 777 . Find the total market quantity and the resulting market price, using the inverse demand function. ii. Find the resulting profits for United and American Airlines. ii. Find the resulting profits for United and American Airlines. c. Now fill in the profit matrix below by repeating part (b) with different aircraft (quantity) choices for each airline. An example of how to fill it out is given below: d. Use the profit matrix to determine the equilibrium total number of seats (Q) offered by the airlines on the route. There may be more than one equilibrium point in the matrix. e. Suppose United and American were now to collude to maximize their combined profits. Which choice of plane would each one make? Explain how this affects the market price, and the equilibrium number of total seats offered to passengers, and without doing any calculations, whether deadweight loss increases or decreases relative to the equilibrium in (d). Recently, Spirit was in talks to merge with JetBlue or Frontier. Using the below market shares of US airlines, which of the two mergers (Spirit-JetBlue or Spirit-Frontier), if any, would regulators be likely to challenge? Justify your answer using the Herfindahl Hirschman Index (HHI)