Question

Prior to 1978 the domestic passenger airline industry was a regulated monopoly/cartel. Yet even with regulated prices exceeding those that would obtain in a competitive market, each firm was barely breaking even. Why? Incorporate a graph to explain what was happening.

Answer 1

Under the regulated monopoly, the airlines companies operated at the level when MR=MC and charged price at P1. But, at this price level, demand was fairly low. It caused the airlines companies to be unable to recover their fixed cost and achieve the break even. A break even is only achived when fixed cost is also recovered. But, at price level of P1 and output Q1, these companies could not achieve the break even.

To do this, they should have operated at P = ATC level where the output will be Q2 and price will be P2. I will reduce the price, but more people will be served, helping the companies to achieve the break-even.