Figure 8.10
-In Figure 8.10, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit maximizing price of $300 per ticket. Suppose that Fly Smart discovers that a second airline is contemplating entering the market. If the minimum market entry quantity is 130 passengers per day, which is more profitable, entry deterrence or the passive duopoly outcome?

Question

Quizplus · Accepted Answer

Entry deterrence can be more profitable for Fly Smart if it can prevent the second airline from entering the market by strategically lowering prices or increasing output to make the market less attractive for the newcomer. This can maintain its monopoly power and potentially keep profits higher than in a duopoly situation where it would have to share the market and possibly engage in price competition.

Figure 8.10 -In Figure 8.10, Airline Fly Smart Is Initially a Secure