Assume that the incumbent airline does not abandon route 3 completely, so that it serves route 3 passengers with a low value of time by transporting them via the hub in city B. State which airline charges a higher airfare on route 3, and explain the intuition behind your answer. 3. Consider a modified version of the code-sharing agreement model given in Section 9.3. Suppose that the frequency of flights provided by airline α and airline β are fα and fβ, respectively. Suppose that fα and fβ are given exogeneously and cannot be altered by any airline. Suppose now that passengers’ utility functions are given by Uα def =  3fα − pα flies α 3fβ − δ − pβ flies β, and Uβ def =  3fα − δ − pα flies α 3fβ − pβ flies β. Assume that the airline firms do not bear any type of cost (i.e., µ = 0). Answer the following questions.

(a) Calculate the UPE airfares and the associated profit levels assuming that there are no agreements between the two airline firms.

(b) Calculate the UPE airfares and the associated profit levels assuming that the two airline firms are engaged in a code-sharing agreement.

(c) Suppose that fα > fβ, which means that airline α maintains a higher frequency than airline β on this route. Which airline gains and which airline loses from the code-sharing agreement?