6 proposition 1 i the fare pa is lower than the pre

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Unformatted text preview: pa is lower than the pre-alliance fare pna + pna . 12 1 2 ii) Airline profits with the alliance are higher than before for 0 < d/b < 0.66. iii) The fares set by airlines 3 and 4 are lower and so are their equilibrium profits. The above results partially confirm Cournot's (1838) model of complementary duopoly. Cournot considered the merger of two monopolists that produce complementary goods (zinc and copper) into a single (fused) monopolist that produces the combination of them (brass). The price of the composite good is lower than under independent ownership. The alliance between airlines that offer complementary services internalizes the externality that arises when they set fares independently thus ignoring the effects on their individual markups. If there were no competition from a substitute flight, then the alliance would always turn out profitable - as in Cournot's example. However, the presence of airlines 3 and 4 unveils that the alliance will 6 The difference pna + pna - pa yields 3b2 (3b + 2d)/(54b4 - 42b2 d2 + 8d4 ), which 1 2 12 is clearly positive provided b > d. Since prices are str...
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This note was uploaded on 05/12/2010 for the course MAN 6721 taught by Professor Kraft during the Spring '10 term at University of Florida.

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