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, what price should Smart Fly charge to secure the entry-deterring quantity?

Question

Quizplus · Accepted Answer

To deter entry, Fly Smart needs to price low enough that the potential entrant will not find it profitable to enter the market. To do this, Fly Smart needs to capture all of the demand up to the potential entrant's minimum market entry quantity of 130 passengers per day. From point M, draw a horizontal line across to the vertical axis at the quantity of 130. Then draw a vertical line down to the demand curve to find the corresponding price of $220. Therefore, Fly Smart should charge a price of $220 to secure the entry-deterring quantity.

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