Cities A, B, and C are located in different countries. The only airline serving the market between

Question:

Cities A, B, and C are located in different countries. The only airline serving the market between A and B is Ajax Air. Its total cost is CAjax = 20QAB. The airfare between A and B is PAB. Also, the only carrier serving the market between B and C is Sky Air. Its total cost is CSky = 20QBC. The airfare between B and C is PBC. The two airlines do not serve any other markets.

All traffic on the network flows between A and C, using B only as a point to interconnect with the other airline. (In other words, no traffic originates or terminates at B.) The demand for passenger service between A and C is QAC = 220 - PAC, where Q is the number of units of passenger traffic demanded when PAC, the total airfare between A and C, is PAB + PBC.

a) The preceding table shows the profits for each carrier for various combinations of airfares. The upper left number in a cell shows Ajax's profit; the lower right number shows Sky's profit. Suppose Ajax charges PAB = 100 and Sky charges PBC = 90. Determine the profit for each of the two carriers, and enter your calculation in the table.
b) Currently, Ajax and Sky are not allowed to coordinate prices. They must act noncooperatively when setting their fares. Using the preceding table, find the Nash equilibrium fares. Explain how you arrived at your answer.
c) The two airlines have been lobbying antitrust authorities to allow them to merge, an act that would enable them to price jointly as a monopolist. The merged airline would still stop at B for refueling. The cost and demand curves would not change if the carriers merged. Use the table to determine what price the merged entity would charge for a trip between A and C, and explain your reasoning clearly.