In a past fare war, U.S. Air reduced the price of its Charlotte, North Carolina, to...
In a past fare war, U.S. Air reduced the price of its Charlotte, North Carolina, to New York City round-trip fare from $198 to $138 to match American Airlines. U.S. Air did so reluctantly, saying it would cost the company millions of dollars in revenue. American, on the other hand, believed the fare cut would increase its revenue. What different assumptions about the underlying price elasticity of demand did each airline believe true?
Homework Answers
Both of these airlines have reduced their prices/fares. But on one side American Airlines is expecting that its revenue will increase US Air is expecting that its revenue will decrease. We know that price reduction will decrease revenue when the demand is relatively inelastic and that price reduction will increase revenue when demand is elastic.
Therefore we can presume that American Airlines must be facing elastic demand while US Airlines must be facing an inelastic demand.
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