Question

The airport shuttle services market is best modelled as Cournot competition. This is because competing firms must hire shuttle buses and establish supporting technical infrastructure before offering airport shuttle services. Demand for airport shuttle services is, Q = 480,000 - 4,000P where Q represents the total number of passengers transported per year, and P is the price per passenger At present, MAS charges $50 a person and transports 280,000 passengers per year. While the firm is inefficient, it manages to return an operating profit of $8,000,000 per year into government revenues. The competition authority expects that after implementing the market reforms, all firms in the market (including MAS) will be more efficient. Each firm's per person marginal cost in the market will be $12, and all firms face fixed costs of $1,200,000 per year. When completing the industry analysis you should assume that firms are engaged in Cournot Competition.

Answer 1

The airport shuttle services market is a case of Cournot competition, where firms face high fixed costs and economies of scale, supporting a certain number of firms. The airline industry example demonstrates oligopoly dynamics where established players deter new entrants through pricing strategies. Opportunity costs of time are significant in this market and valued monetarily.

Step-by-step explanation:

The airport shuttle services market is a representative case of Cournot competition, where firms choose quantities of output rather than prices, taking into account their competitors' production decisions. Given a market demand curve, firms hire necessary resources and face operating costs. When firms are subject to significant fixed costs and economies of scale (as with the airport shuttle services), market conditions can support only a certain number of firms.

The case of the airline industry provided as an example mirrors typical oligopoly market dynamics where barriers to entry are high due to the need for large capital investments (i.e., shuttle buses, technical infrastructure) and the presence of significant economies of scale. As a result, smaller entrants cannot compete effectively with established players who are able to set prices low enough to deter new competitors, as demonstrated by the incumbent airline that slashes prices when faced with a new entrant. This tactical pricing effectively maintains market share and discourages potential competitors.

In assessing the opportunity costs of time, economists often attribute a monetary value to time, especially in the airline industry where business travelers have a high implicit value of time. These costs are as important to consider as direct financial costs when analyzing market behaviors and consumer choices.