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.

SKY 100 PAR 100 1600 :: 95 | 1875 PaB= 90 | 2100 PB 85 2275 Pa80 2400 PAB-70 2500 P4B265 2475 P,B= 60 |2400 =55 | 2275 95 85 65 2000 4400 4800 5200 1875 2475 2400 2275 2625 3000 4125 4500 4875 20002250 2400 2800 3000 3200 2450 2600 2700 2450 2450 3150 4550 4900 5250 2625 2925 2925 2625 3575 4225 4550 4875 5200 3300 3150 AAX 4500 4800 5100 3375 3575 3375 3200 2975 2750 4500 4750 4125 4200 2925 4225 3150 4200 3825 3325 3825 4275 4500 4500 4550 4550 4500 4250 4050 3500 4200 4875 4900 4800 4500 4275 3675 2450 2975 3500 3675 3850 4500 3850 Ajax Air: Air tare PAB Sky Air: Air fare Pac Cost: CAB-200AB Cost: CBc 200Bc