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Unit 13: Oligopoly

American, which has been operating in New York for 80 years, is clearly threatened by Notes
its loss of market share. It responded to Delta’s move by saying it would collaborate
with JetBlue on some routes and also add 31 new fl ights from Kennedy and La Guardia,
including new routes to Minneapolis-St. Paul, Atlanta and Charlotte, N.C., on regional jets
outfitted with new fi rst-class seats.

In a letter to employees after these announcements, Gerard J. Arpey, the chairman and
chief executive of AMR, American’s parent company, said, “We are in a tough, important

fight in New York — a fight we intend to win.”
But while Delta has big plans to grow in New York, one sore point is its drab and cramped
Terminal 3 at Kennedy, built in 1965 for Pan Am. It is now straining to accommodate

Delta’s five million international passengers a year.
The executive director of the Port Authority of New York and New Jersey, the agency that

runs the city’s airport, has been critical of the terminal, describing it as unfit as a point of
entry for overseas arrivals.
JetBlue, by contrast, opened a sleek, airy $743 million terminal at Kennedy last fall. And
American has a new and modern terminal at Kennedy, too. Completed in 2007, it cost $1.3
billion.
Delta executives concede they have a problem at Kennedy, and said they are working on a
solution. “If you ask me what keeps me awake at night, this is it,” Ms. Grimmett said. “It’s
an unpleasant experience, sometimes.”
The third front in the battle for New York’s travelers is invisible to most passengers but
potentially the most critical for airlines.

In October, 2009, Continental defected from the Sky Team alliance, dominated by Delta
and Air France, to join Star, the alliance established by United and Lufthansa.
The switch provided Star with a badly needed New York hub. American, which is part
of Oneworld with British Airways, is expecting to gain antitrust immunity for its Atlantic
routes later this year and hopes to be in a better position to compete with the other two
rivals.
William S. Swelbar, a research engineer at the International Center for Air Transportation
at the Massachusetts Institute of Technology, said New York was a major laboratory for
the alliances.
“New York is vital for each of the three alliances,” he said. “It’s a global game, and it is
playing right in front of us.”
Question
Explain the oligopolistic market situation in the US aviation industry? How does the
merger help in our better understanding of the market conditions?

Source: www.nytimes.com

Task Two duopolist manufacture identical radio sets. The total cost of an output x
⎡ 1 ⎤
+
2
sets per month in ` ⎢ ⎣ 25 x + 3x 100 for each duopolist. When the price is ` p per set, the
⎥
⎦
market demand is x = 75 – 3p per month. What is the total equilibrium output per month.

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