Question: The World's Largest Airline United Airlines and Continental Airlines announced a $3 billion merger to create the world's biggest airline. The new airline will be able to better compete with low-cost domestic and foreign airlines. Travellers could face higher fares although the merged airline has no such plans. But one rationale for any merger is to cut capacity.
a. Explain how this airline merger might (i) increase air travel prices or (ii) lower air travel production costs.
b. Explain how cost savings arising from a cut in capacity might be passed on to travellers or boost producers' profits. Which might happen from this airline merger and why?