7 proposition 2 i the fare paa is lower than pa pa

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Unformatted text preview: lower than pa + pa when airlines 1 and 2 34 3 4 form an alliance. Furthermore, paa is also lower than pa . 12 12 ii) Airlines 3 and 4 profits with the alliance are higher than before for 0 < d/b < 0.77. Furthermore, profits of alliance between 1 and 2 decrease. Again, the alliance (or integration) of companies providing complementary products drives prices down. Not only the fare of the new alliance decreases but also that of the rival; this happens because prices are strategic complements. It then follows that, as illustrated in proposition 1, the formation of an alliance is disadvantageous for rivals no matter they set fares cooperatively (as in this subsection) or non-cooperatively (as in the previous subsection). The intuition for airlines 3 and 4 to strategically form an alliance is the same as before. The price decrease is lower the higher the degree 7 aa a provided b > d. The difference 34 /2 - 3 yields (b/2)(2b + d)2 (2b4 - 4b2 d2 + d4 )/(4b2 - b[(4b2 + d2 ) (2 + 2 ) + 8bd] 2 (4b2 - d2 )2 b (2b + d)2 = = b (paa )2 34 2 - d2 )2 (4b The difference pa +pa -paa results in b2 (2b +d)/(12b4 -7b2 d2 +d4 ), which is positive 3 4 34 d2 )2 (3b2 - d2 )2 . The sign of the difference is...
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