Two airlines "Ununited" and "Beta" are in the process of bargaining over who will serve the route from Eugene to San Francisco. There are approximately 50,000 travelers/trips on the route per year. If the two airlines compete the market price will be $50 per trip and they will split the trips equally. If they divide the trips with Ununited providing the morning flights and Beta the afternoon flights, then Ununited will service 20,000 trips at a price of $100 per trip while Beta will service 30,000 trips at a price of $120 per trip. The two airlines engage in Nash bargaining to determine their payoffs if they divide the route in the manner described.

(a) Derive the threat points for the two airlines

(b) Drive the surplus to be spit between the two airlines.

(c) Assuming equal bargaining skill what is the Nash bargaining solution? Does this involve Beta paying Ununited or vice versa and how much?

(d) Suppose now that if (and only if) the two airlines divide the trips a third airline "Cold North Airlines" will enter the market. Both Ununited and Beta will lose 10,000 trips to Cold North. Would Ununited and Beta still wish to bargain with each other? If so what would the new bargaining solution be?