Southwest Airlines is a major carrier based in Texas, and has made a strategy of cutting fares

drastically on certain routes with large effects on air traffic in those markets. For example on

the Burbank - Oakland

route the entry of Southwest into the market caused

average fares

to fall by

48% and increased market revenue from $21 327 008 to $47 064 782 annually. On

the Kansas City - St. Louis route however, the average fare cut in the market when

Southwest entered was 70% and market revenue fell from an annual $66 201 553 to $33 101

514.

Questions

1.

Calculate the PEDs for the Burbank-Oakland and Kansas City-St. Louis routes.

2.

Explain why the above market elasticities might not apply specifically to Southwest.

3.

If Southwest does experience a highly elastic demand on the Burbank-Oakland route,

what is the profit implication of this?

4.

Explain why the fare reduction on the Kansas City-St. Louis route may still be profitable

strategy for Southwest, giving four different reasons.