MBAA 522 Problem Set 7 | Complete Solution

1.  Between 1995 and 1997, American Airlines competed with several low-cost-carriers on routes from Dallas/Fort Worth.  The US Department of Justice sued alleging predatory pricing.  A judge disagreed.  Read this article from the Wall Street Journal (available through the Hunt Library ProQuest database):

Wilke, J. R., & McCartney, S. (2001, April 30).  American Airlines secures antitrust win --- Judge dismisses U.S. case, says competitive moves were company's right.  Wall Street Journal (Eastern edition), pp. A.3.

The antitrust legal standard for predatory pricing is pricing below variable or marginal cost.  Discuss why the plaintiffs lost this case in the face of what most lay people would consider predatory pricing.  Hint:  Consider how to compute marginal cost for an airline. 

1. Most large airlines operate networks, or hub-and-spoke systems, which connect many spoke cities (or nodes) with flights to and from a hub airport. 

1. A network carrier serves 39 spoke cities from a single hub.  How many city-pairs does it serve?  (A city-pair is City A to City B.  City A to City B and City B to City A are consider just one city-pair)
2. This same airline adds a 40th spoke city to its network using a 100 seat capacity aircraft.  On a flight from this 40th spoke to the hub, how many passengers, on average, does it need to attract to each destination to achieve an 80% load factor?