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Oligopoly considerations

Compiling research to support MBA Econ Research paper. Any help greatly appreciated.

There are 3 major airports within South Florida. Given this is airport oligopoly structure. If 1 airports operating expenses are increased, thus resulting in costs being passed on to the consumer -

1. What impact will it have on the consumer?
-How will the added costs trckle down to the consumer?
-Assuming consumer is price sensitive, and choices not to fly out of this airport, what are the travel alternatives?

2. What impact will it have on the airlines?
-Will it force the above airport to cut or eliminate services?
-Given the nearby airports will not raise their prices, how will the shift in consumer demand impact them?

Solution Preview

In an oligopoly, each firm can set its own price to some degree. Other firms watch their rivals to determine the most profitable price. An increase in expenses would be a signal to raise prices. One airport would likely act as a "price leader" and increase its price slightly. The other airports would likely follow suit. The final price would therefore be higher, in essence causing the increased expenses to be borne by the consumer.

The slope of the demand curve tells us how "price sensitive" consumers are. A steep demand curve indicates that for every unit the price increases, the quantity demanded will decline by proportionately less. A demand curve with a shallow slope indicates the opposite. Consumers who are price sensitive could choose to travel to nearby airports or to travel by a different method. However most people travel for convenience and a slightly higher price would probably not deter them.

So, assuming the shallow demand curve, we ...

Solution Summary

The effects of increased operating expenses on airport oligopoloy are determined.