Problem
Proflight is a major local carrier based in Zambia, and it has made a strategy of cutting fares drastically on certain routes with large effects on air traffic in those markets. For example, on the Lusaka-Ndola route the entry of Zambian airways into the market caused average fares to fall by 48 per cent and increased market revenue from K21,327,008 to K47,064,782 annually. On the Lusaka- Livingstone route, however, the average fare cut in the market when Southwest entered was 70 per cent and market revenue fell from an annual K66,201,553 to K33,101,514.
Task
i. Calculate the PEDs for the Lusaka-Ndola and Lusaka-Livingstone routes.
ii. Explain why the above market elasticities might not apply specifically to Proflight.
iii. If Southwest does experience a highly elastic demand on the Lusaka-Ndola route, what is the profit implication of this?
iv. Explain why the fare reduction on the Lusaka-Livingstone route may still be a profitable strategy for Proflight.