Start by reading this article about a lawsuit accusing airlines of colluding to keep prices high....

Start by reading this article about a lawsuit accusing airlines of colluding to keep prices high. https://www.nytimes.com/2018/01/06/business/southwest-airlines-lawsuit-prices.html. Then find at least one additional article about potential airline collusion to extend your knowledge. (This has been in the news a lot in the last 3 years, so there will be many good articles with analysis to choose from!) Answer the following questions:

1. Summarize the second article you found and what additional information you learned from it. (Be sure to provide a link for the article in case we'd like to read it too.)

2. What type of market structure does the airline industry appear to be from your reading? Explain why you came to that answer.

3. Given that market structure, is it likely that they would benefit from collusion? Explain your answer using what you learned in the textbook.

Just answer question 3

Solutions

Expert Solution

3.
It is the oligopoly market structure, where the firms (in this case airlines) collude and increase prices by creating artificial shortage in the market. Due to the shortage of supply of services, consumers are forced to pay more and get exploited by the airlines. Due to collusion among the airlines in the oligopoly market structure, it is possible to make profit, but it requires all the participating firms to trust each other and stick to the prices fixed as a part of the collusions. If trust among the firms breaches and one firm decreases the price in an effort to raise the profit, other firms also follow the same and reduce the prices. But, if one firm increases the price, then other firms don’t act. It reduces the revenue of the firm that increases the price. It gives the concept of sticky price in the oligopoly competition.
The collusion is also affected by kinked demand in the oligopoly. Above the sticky price agreed in the collusion, the demand is highly elastic and increase in price above the sticky price, will result into the shift of demand for other substitute products. Though, the demand at a price below the sticky price is relatively inelastic and reducing prices will not lead to increase in demand. So, collusion gives profit if all participating firms agree to maintain one price in the market.

Rahul Sunny answered 1 year ago

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