Assume that the airline industry is characterized as a duopoly in which two firms produce identical products. American Airlines’s marginal cost of is $90.00, while United’s marginal cost is $180.00. Assume that the inverse demand curve for air travel is defined by the equation:
Q = 339 - P
A) If the two firms compete by choosing quantities simultaneously (aka Cournot), how many units will be produced by each firm, and what is the market price? Calculate each firm’s profits.
B) Assume that American and United instead compete by choosing prices simultaneously (aka Bertrand). What is the market price and quantity? Calculate the profits of the two firms.