Since prices are strategic complements it follows

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Unformatted text preview: ategic complements it follows that pa and pa are now lower, and so are profits to airlines 3 and 4 by the way equilibrium 3 4 24b2 d2 + 8d4 )/(9b2 - 4d2 )2 (3b2 - d2 )2 . The sign of the difference is given by the sign of a na profits are written. Finally, the difference 12 /2 -1 yields (b/4)(3b + 2d)2 (9b4 - 9b4 - 24b2 d2 + 8d4 . The difference is positive for (d/b) < 0.66. 8 be profitable if competition is not too intense. Values of b far from values of d imply that product differentiation is strong and hence competition intensity is low; the difference in fares is smaller for smaller values of d. Then, although prices go down the increase in travel volumes is such that profits under the alliance situation are higher. Strategic complementary pushes prices of rival airlines down and consequently their profits. Our findings can also be related with the literature on mergers with complementary products. Thus, Gaudet and Salant (1992) consider the case of n firms producing perfect complements and competing in price. They suggest that a...
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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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