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# class18-post - Class 17 Game Theory Merger NWA and Delta...

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Class 17 Game Theory

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Merger: NWA and Delta elta and NWA proposed a merger ± Delta and NWA proposed a merger. What will be the consequence? ± If the airline market is competitive: None! ± If the airline market is not competitive? ± Non-competitive market: rice changes if single firm changes number of flights ± Price changes if single firm changes number of flights. ± Less flight capacity may lead to higher prices ± What are the incentives of NWA and Delta to reduce flight capacity? Æ Game Theory
Outline eminder: Monopoly Pricing ± Reminder: Monopoly Pricing ± Games: Actions and Preferences ± Dominated Actions

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Cournot: Capacity Choice by UA and AA 339 Demand for Flights: P (Q) = 339 - Q Reminder: Monopoly Quantity Choice stimated costs: \$147 (Q) Q Estimated costs: \$147 339 Quantity Q Reminder: Monopoly Quantity Choice Suppose United would be a monopolist. Monopolist chooses Q to maximize Π ( Q ) = TR (Q) – TC (Q) Æ Π ’ ( Q ) = MR – MC =0 MR (Q) = MC (Q)
Cournot: Capacity Choice by UA and AA i t C h i 339 Capacity Choice American and United choose capacity on ORD – LAX Demand for Flights: P (Q) = 339 - Q Price depends on joint supply: P(Q) = 339 – ( q A + q U ) ptimal capacity of American (Q) Q 339 Quantity Q Optimal capacity of American depends on capacity choice of United.

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Cournot: Capacity Choice by UA and AA i t C h i 339 Demand for Flights: P (Q) = 339 - Q Capacity Choice American and United choose capacity on ORD – LAX (Q) Q Price depends on joint supply: P(Q) = 339 – ( q A + q U ) ptimal capacity of American 339 Quantity Q Optimal capacity of American depends on capacity choice of United. Example: Suppose AA and UA can choose only between a high or a low quantity, q H =64 or q L =48
i t C h i Cournot: Capacity Choice by UA and AA q H =64 q L =48 q H =64 \$4.1 / \$4.1 \$5.1 / \$3.8 Capacity Choice American and United choose capacity on ORD – LAX q L =48 \$3.8 / \$5.1 \$4.6 / \$4.6 Price depends on joint supply: P(Q) = 339 – ( q A + q U ) ptimal capacity of American Optimal capacity of American depends on capacity choice of United.

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## This note was uploaded on 12/10/2011 for the course ECON 401 taught by Professor Burbidge,john during the Winter '08 term at Waterloo.

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class18-post - Class 17 Game Theory Merger NWA and Delta...

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