United Airlines and American Airlines both fly between Chicago and San Francisco. Their demand curves are given by QA = 1000 - 2PA + PU and QU = 1000 - 2PU + PA. QA and QU stand for the number of passengers per day for American and United, respectively. The marginal cost of each carrier is $10 per passenger.
a) If American sets a price of $200, what is the equation of United's demand curve and marginal revenue curve? What is United's profit-maximizing price when American sets a price of $200?
b) Redo part (a) under the assumption that American sets a price of $400.
c) Derive the equations for American's and United's price reaction curves.
d) What is the Bertrand equilibrium in this market?