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Econ501aH5ansW07 - Homework#5 Answers Chapter 15 question...

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Homework #5 Answers Chapter 15, question for discussion 4. Under regulation, the prices were set so high that serving customers was very pro fi table. Planes were fl ying with plenty of empty seats, but airlines were not allowed to attract customers by cutting the airfares. As a result, fi rms competed for customers by o ff ering them a better package of services. For example, suppose a high quality meal can be provided at a marginal cost of $20, but travelers would be willing to pay only $10. Under regulation, consumers would choose the airline providing the meal, since the airfare is the same. Airlines were happy to provide these expensive services, if it meant attracting the traveler and receiving the high ticket price. If airlines can compete on price, the airline providing the meal must charge $20 more than the airline not providing the meal, so the consumer would choose the airline not providing the meal. Under competition, these expensive services would not be provided.
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