The sign of the difference is given by the sign of

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Unformatted text preview: given by the sign of 2b4 - 4b2 d2 + d4 . The difference is positive for values of d/b below 0.77. 10 of product differentiation. Consequently, low values of the ratio d/b make it such that the alliance is profitable despite the loss associated with lower prices. It is also worth mentioning that a setting with two alliances leads to lower fares and higher total travel volumes. These theoretical findings coincide with some observed facts in the airline industry. As for consumer surplus, CS a > CS na unless d/b is very high (above 0.943). Put differently, when products are very weakly differentiated an alliance will damage consumers. It is well known that with homogeneous products, mergers reduce consumer surplus. The difference CS aa - CS a has an ambiguous sign. As expected, the sign depends on the size of the demand parameters and .8 In particular, if the market of the new allied airlines,, is sufficiently large relative to the one of the already allied airlines, , then the setting with two alliances will result in higher consumer surplus for every d/b (0, 1). 2.3 A simultaneous game of airl...
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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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