Question

In a recent fare war, WestJet reduced the price of its one-way airfare from Vancouver to Winnipeg from 5198 to $138 to match the price offered
by Air Canada. WestJet matched the fare reluctantly, saying it would cost the company millions of dollars in revenue for those tickets to be sold for
less. Air Canada, on the other hand, believed the fare cut would increase its revenue even if rival airlines matched the lower fares. What different
assumptions about the underlying price elasticity of demand for airline tickets on that route did each airline believe true

Answer 1

According to the total revenue test:

• If Price elasticity of demand is elastic(Ed>1), then Price and total revenue moves in opposite direction.
• If Price elasticity of demand is inelastic(Ed<1), then Price and total revenue moves in same direction.
• If Price elasticity of demand is elastic(Ed=1), then Price change does not cause any change in total revenue.

WestJet matched the fare reluctantly, saying it would cost the company millions of dollars in revenue for those tickets to be sold for less. Here is assumes that Price elasticity of demand is inelastic that cause reduction in revenue as fare decreases.

Air Canada, on the other hand, believed the fare cut would increase its revenue even if rival airlines matched the lower fares. Here is assumes that Price elasticity of demand is elastic that cause rise in revenue as fare decreases.