INSTRUCTOR DISCUSSION NOTES:
Airlines Fixing Fares? Naahhhhh....

1. Why is cartel activity so difficult to maintain?

Collusion is illegal in the US, so cartels are difficult to maintain. Further, firms have an incentive to cheat to gain even higher profits, as the history of OPEC and other "trusts" have shown.

2. Suppose British Airways was, in fact, guilty of colluding with the other airlines, but then prior to this investigation it decided it was no longer going to cooperate with the other airlines. What would happen in this market? Why?

Passenger price would fall. We move toward the non-cooperative solution in a prisoner's-dilemma-type game.

3. Given the difficulty in maintaining a cartel, is it incumbent upon the government to do something to break up cartels? Why or why not?

Answers vary. Make sure students focus on the individual market, and whether it would be possible for market participants to unilaterally destroy a cartel.

Multiple Choice/True False Questions

1. A cartel is
  1. A group of firms that sell oil
  2. A group of firms that act competitively
  3. A group of firms that act monopolistically
  4. A and C
ANS . c

2. What incentives do the airlines have to cooperate with each other, as the article indicates?
  1. Profits are higher when they cooperate than when they compete.
  2. Profits are higher when they compete than when they cooperate.
  3. Additional firms are prevented from entering the market.
  4. A and C.
ANS . d

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