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MBAA 522 Problem Set 7 Assignment

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Question;Between;1995 and 1997, American Airlines competed with several low-cost-carriers on;routes from Dallas/Fort Worth. The US;Department of Justice sued alleging predatory pricing. A judge disagreed. Read this article from the Wall Street;Journal (available through the Hunt Library ProQuest database);Wilke, J. R., & McCartney, S.;(2001, April 30). American Airlines;secures antitrust win --- Judge dismisses U.S. case, says competitive moves;were company's right. Wall Street Journal (Eastern edition);pp. A.3.;The antitrust legal standard for;predatory pricing is pricing below variable or marginal cost. Discuss why the plaintiffs lost this case in;the face of what most lay people would consider predatory pricing. Hint;Consider how to compute marginal cost for an airline.;Most;large airlines operate networks, or hub-and-spoke systems, which connect many;spoke cities (or nodes) with flights to and from a hub airport.;A;network carrier serves 39 spoke cities from a single hub. How many city-pairs does it serve? (A city-pair is City A to City B. City A to City B and City B to City A are;consider just one city-pair)This;same airline adds a 40th spoke city to its network using a 100 seat;capacity aircraft. On a flight from this;40th spoke to the hub, how many passengers, on average, does it need;to attract to each destination to achieve an 80% load factor? How;can a network airline profitably serve smaller cities than a low-cost-airline?;(Hint: Consider 2b above). A;network carrier serves some small cities close to its hub with regional jets;which have much higher seat-mile-costs (CASM) than larger mainline jets. The average fare from these cities to the hub;does not cover fully allocated costs. Is;this rationale? Networks;are subject to negative externalities.;How might such externalities affect a network carrier?s decision to add another;spoke city to its network? Explain. (You may wish to use marginal benefit/cost;analysis).;In;the early 1990s, Airbus and Boeing were both considering building a new Very;Large Aircraft (VLA). Airbus faced this;decision tree. Boeing?s decision was;similar. Why did only Airbus build the VLA;the A-380? The numbers in parentheses;indicate the 20 years incremental profit in billions of dollars for Airbus and;Boeing.

 

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