Question

Three airlines account for most of the air traffic in and out of a local city. If the three airlines joined together in setting fares and air travel schedules, economists would say that they were acting as:

Answer 1

Answer:

The options for this question are the following:

A. a cartel, as the three airlines together would attempt to coordinate policies in the local market to jointly maximize profits.

B. monopolistic competitors, as each firm would have to differentiate its airline services from its rivals.

C. perfect competitors, as each firm would sell travel services at the same fares as the other airlines.

D. kinked demand curve oligopolists.

The correct answer is A. a cartel, as the three airlines together would attempt to coordinate policies in the local market to jointly maximize profits.

Explanation:

A cartel is a formal agreement between two or more companies in order to reduce competition between them and increase their profits or joint profits.

A cartel is the formal expression of a collusion agreement. This implies that firms explicitly agree on the level of certain competitive variables such as price, quantity, distribution of customers or areas, etc.

The goal of cartel members is to increase joint benefits at the cost of reducing or eliminating competition. In this way, it is intended to act as a monopoly by increasing prices, reducing the quantity and increasing the profits obtained from sales.