South-Western College Publishing - Economics  
AirTran's Formation
Subject Competitive Oligopoly
Topic Product Markets
Key Words Airlines, Fares, Profit
News Story AirTran, the former ValuJet, is undergoing a makeover. The planes have been repainted, the seats refurbished, and more business-class seats installed. Employees now dress more formally, and receive more training. Computer reservations are now possible; reserved seats can be booked. Most important, following the ValuJet crash the government carefully scrutinized AirTran's safety.

While the company has not made a profit since the crash, the prospects look good for later in 1998. AirTran is undercutting the fares charged by major airlines, and the average fare is rising, indicating more business-class passengers are being served. Complaints are down, but the going is still tough. Some people continue to be wary of AirTran because of its safety history. Also, major airlines are competing with their low-fare subsidiaries, such as Delta Express.
(Updated June 5, 1998)

Questions 1.  a.  How do you know from the article that the airlines are interdependent?
     b.  Why are the airlines interdependent?

2.  What factors evident in the article would make the formation of a cartel of airlines difficult?

3.  In the competitive air travel industry, the moves and countermoves of producers can be represented in terms of a game in which there are different payoffs to different combinations of strategies by rivals. What would be the payoffs to each airline where:

  1. Delta has a good image and AirTran has a relatively damaged image?
  2. Delta has high prices and AirTran has low fares?
4.  The article reports that AirTran is sprucing up its image while Delta Express is competing on many of AirTran's routes. How are these changes likely to affect the payoffs you identified in Question 3?
Source Source: Keith L. Alexander, "AirTran hopes to overcome history, rivals," USA Today, April 6, 1998.

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