Problem Set 8
1. 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.
2. 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 and evaluate how well airline markets meet these criteria.
3. Price outcomes of the 5 oligopoly models differ substantially. Which models produces the lowest and highest total profits (all firms combined)? What are the predicted prices? Provide aviation industry examples of routes or markets that might approximate each of these two outcomes.
4. 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. What oligopoly model does this suggest and what characteristics of express package business would lead to this outcome.
5. 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.” Explain why the OPEC members often disagree on how much petroleum each country should produce.
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