Feb 1, 2011 - February 1, 2011 - Lecture 8 ECON 221:...

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ECON 221: Midterm on Tuesday February 8, 2011 **Read articles by Diamond (Sec. III) and Hazlitt (Sec. IV)** Boeing 767 Airbus 320? (Should it be introduced? Since it costs hundreds of millions to develop a plane) ---> cost = $1 billion U.S. EC (Europe) Monopoly Revenues $900 million $900 million Total Duopoly Revenues $600 million $600 million Change in Consumer Surplus $700 million $700 million Airbus loses money if they introduce the Airbus 320, because they aren ʼ t covering their cost If EC helps Airbus, by allowing only Airbus planes to Fy in Europe, then Airbus has a monopoly in EC and is part of a duopoly in the U.S. But if EC chooses to not abide by their promise, then Airbus incurs a loss The incentive EC has to do this, is that its Consumers bene±t from the lower prices that the competition causes between the 2 ±rms EC makes more by allowing the competition ($1.3 billion v.s $1.2 billion) This is all assuming the U.S. accepts all this passively Suppose U.S. reciprocates the ban; the pro±t for Airbus will become negative ($900 million - $1 billion); they opportunity cost for the reciprocation is the Consumer Surplus of $700 million And now Boeing has a Monopoly in both markets Credible Commitments Reputation: Establishing a reputation can be costly, but can allows that establisher a monopoly in the
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Feb 1, 2011 - February 1, 2011 - Lecture 8 ECON 221:...

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