Airline Manufacturer A and Airline Manufacturer B are duopolists in their industry. Explain how the two...
Airline Manufacturer A and Airline Manufacturer B are duopolists in their industry. Explain how the two firms could collectively benefit if they were to collude and form a cartel. Why might collusion be difficult?
Homework Answers
The airline industry is an example of oligopoly. The two firms could collectively benefit if they collude and form a cartel because collusion between the firms leads to an greement between the firms that both the firms will charge a higher price from the customers. If both the firms are charging same high prices then customers will have no option but to buy the product at higher prices and in this way both firms can make profits. However, maintaining cartel is difficult because each of the firm has an incentive to lower the price and capture market share while other firm is charging high price and they can earn higher profit by not following the agreement. Thus, even if one firm defaults on the agreement then cartel will fail and this makes collusion difficult in case of cartels.
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