Suppose the airline industry consists of two firms, A and B. These two firms engage in Cournot competition with each other over a certain route for which inverse demand is P(Q) = 1000 − Q with Q = qA + qB. The main component of each airline’s marginal cost is fuel which is assumed to cost 400 per flight (regardless of the number of passengers).
(a) Solve for the Cournot equilibrium price.
Suppose the airlines figure out a way to collude with each other and still have the same fuel cost of 400 per flight.
(b) Solve for the market price when the two firms collude
Suppose for whatever reason the world price of oil falls (as it has), and fuel costs for the airlines fall with it so that their marginal cost is now 100 per flight.
(c) Solve for the new Cournot equilibrium price assuming the firms are not colluding.
(d) Solve for the new market price assuming the firms are colluding.