Question:
1. In March 2002 American Airlines implicitly increased the price for low-priced business tickets. Competitors did not follow the increase. Which non-collusive oligopoly model can better describe what happened?
2. When other companies refused to follow the increase, American Airlines made an attempt to gain customers in the competitors' markets by applying aggressive discounts on the tariffs. Assuming that American Airlines was ready to temporarily bear negative profits in these markets in order to enter them, represent graphically this attempt by using the appropriate non-collusive oligopoly model
3. The airline market was deeply impacted by the recession of 2008 and by the following slow recovery. Describe graphically what happened in the market due to the recession and to the slow recovery and briefly describe the graph. What can we infer about the characteristics of the demand for flights given that this market was so significantly affected by variations in customers' income?
4. The demand for international flights in the US is, on average, less elastic to price than the demand for domestic flights. The demand for flights decreased during the recession of 2000. During this period the airlines operating internationally recorded a drop in the number of passengers while airlines operating domestically saw an increase. What assumptions can you make about how the airlines' adjusted their prices during the recession and why did the changes lead to these different outcomes in the number of passengers?