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Unformatted text preview: EC 146: Industrial Organization Solutions to Homework 1 Department of Economics Brown University September 28, 2007 1. The know-how required to make and give maintenance to certain type of jet engine is very specific. Besides the fact it is pretty much rocket science (literally!), the knowledge, tools and parts needed to service one brand of engines do not transfer fully across brands. This explains why only one firm would not be able to provide support at one particular airport. A worse situation for an airline to having one aircraft stuck on the ground is having it flying with a broken engine. A tragedy would represent a great loss of future revenue as the airlines reputation would be severely eroded. In order to avoid such a situation, airlines demand before purchasing an aircraft that engine makers pre-commit capital to ensure that parts and service are available at various airports worldwide. This explains why engine manufacturers keep support staff at several airports. Subcontracting is hard to accomplish because the subcontractor would fear being subject to the hold-up problem, whereby the subcontractor may end up heavily invested while the engine...
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This note was uploaded on 07/06/2009 for the course ECON 146 taught by Professor Campos-ortiz during the Fall '07 term at Brown.
- Fall '07