MBAA 523 Advanced Aviation Economics - Problem Set

MBAA 523 Problem Set 8

Revised 12/15

1.       For each of the US products or services in the table, insert appropriate market structure. 

2.       In oligopoly, each firm is acutely aware of the production and marketing decisions of all competitors and carefully considers the potential competitive reactions in all decisions.  Discuss whether firms in other market structures consider the potential reaction of competitors when making important marketing decisions. 

3.       Part of the debate among economists on US airline deregulation in the 1978 involved the theory of contestable markets.  List the four characteristics of contestable markets explained by Baye and Prince and evaluate how well the airline industry meets these criteria.

4.       Price outcomes of the 5 (there are 5, not 4) oligopoly models differ substantially.  Which models produces the lowest and highest total profits (all firms combined)?  Which market structure produce the same prices?      

5.       Oligopoly is the predominant market structure in the airline industry.  In the express package business, FedEx, UPS, and DHL compete in the global air express industry.  In the US, FedEx and UPS are a duopoly.  FedEx and UPS financial indicators such as net margin on sales and return on assets are near the average for US companies (low or zero economic profits).  Which of the 5 oligopoly models best explains the FedEx-UPS duopoly?  List the assumptions of the model and explain how the integrated cargo carriers meet the assumptions.      

6.       The mission statement for the Organization of Petroleum Exporting Countries states, “the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.”  Even when the OPEC members agree on a total output (at times they do not agree), explain why the members often disagree on how much petroleum each country should produce.