# Worksheet

## Worksheet for Unit 11, Oligopoly:

### Situation I:

Only two airlines fly non-stop between the two cities of Jamestown and Luke City.  (note we will assume for purposes of this exercise that non-stop is the only option for flyers.  Other options such as flights that connect in a third city, or that have 1 or 2 stops in other cities don’t exist in this example).  These two airlines are Air Astro and  Bigairways.  The costs of flying are pretty much all fixed costs since each airline flies one flight each day and it costs virtually the same to fly empty as it does to fly full.  There is enough demand to keep both airlines flying, however there are not enough customers to fill the flights of both airlines at the same time.  Typically there are only enough customers on any given day to fill each flight to 75% of capacity.  Since costs are mostly fixed, though, an airline that can obtain more customers than it’s competitor (larger market share) will be much, much more profitable.  The problem is that the only way to increase market share is by having a lower ticket price than the competitor.  If the two airlines offer different ticket prices, then the cheaper-fare airline will fill it’s airplane and make a large profit of \$75,000 per flight per day.  If the two airlines offer different ticket prices, the high-fare airline will lose a lot of customers, have to fly it’s plane with fewer tickets sold, and earn a very, very small profit of only \$1,000.  If the two firms both offer a low-fare, then they split the market 50-50 and they each make the same \$20,000 profit.  On the other hand, if both firms were to offer the same high-fare, then they would again split the market 50-50, but now they would each make \$50,000 in profit.

### Directions:

Complete a Strategy-Payoff Matrix for this game, assuming that Strategy 1 is “low fare” and Strategy 2 is “high fare” and that Air Astro is firm A and Bigairways is firm B.  Be sure to identify all payoffs.  Then answer the questions. If the question asks for an answer that should be in dollars, just enter the whole number without any dollar sign, commas, or decimal.  For example, an answer of \$37,000. should be entered as 37000

Strategy –  Payoff Matrix

Firm B
Strategy 1 for Firm
B:
Strategy 2 for Firm
B:
Firm A Strategy
1 for Firm A:
 Payoffs for Possible OUTCOME A1-B1: Firm A gets: Firm B gets:
 Payoffs for Possible OUTCOME A1-B2: Firm A gets: Firm B gets:
Strategy
2 for Firm A:
 Payoffs for Possible OUTCOME A2-B1: Firm A gets: Firm B gets:
 Payoffs for Possible OUTCOME A2-B2: Firm A gets: Firm B gets:

## Situation I:

Only two airlines fly non-stop between the two cities of Jamestown and Luke City.  (note we will assume for purposes of this exercise that non-stop is the only option for flyers.  Other options such as flights that connect in a third city, or that have 1 or 2 stops in other cities don’t exist in this example).  These two airlines are Air Astro and  Bigairways.  The costs of flying are pretty much all fixed costs since each airline flies one flight each day and it costs virtually the same to fly empty as it does to fly full.  There is enough demand to keep both airlines flying, however there are not enough customers to fill the flights of both airlines at the same time.  Typically there are only enough customers on any given day to fill each flight to 75% of capacity.  Since costs are mostly fixed, though, an airline that can obtain more customers than it’s competitor (larger market share) will be much, much more profitable.  The problem is that the only way to increase market share is by having a lower ticket price than the competitor.  If the two airlines offer different ticket prices, then the cheaper-fare airline will fill it’s airplane and make a large profit of \$75,000 per flight per day.  If the two airlines offer different ticket prices, the high-fare airline will lose a lot of customers, have to fly it’s plane with fewer tickets sold, and earn a very, very small profit of only \$1,000.  If the two firms both offer a low-fare, then they split the market 50-50 and they each make the same \$20,000 profit.  On the other hand, if both firms were to offer the same high-fare, then they would again split the market 50-50, but now they would each make \$50,000 in profit.