2 DEMAND DATA The market. The market size is 500 passengers per flight. Each potential buyer has a valuation for an economy seat, and a (higher) valuation for a business-class seat. Faced with a choice between two different classes of travel, a buyer picks the option that offers the largest gap between the buyer's valuation and the price. Sample information. You, as Bigjet, begin with an incomplete picture of demand. However, a researcher has obtained a random sample of 100 valuation pairs. These were obtained by randomly selecting 100 potential passengers from the population of 500 who might consider making a purchase. However, you do not know the valuation pairs from the remaining 400 potential customers. The sample data are: Econ Bus Econ Bus Econ Bus Econ Bus 913 1595 208 208 1084 2698 616 712 1136 3176 86 86 1022 2222 68 68 445 463 863 1379 62 62 442 460 1115 2975 556 614 598 680 595 676 91 91 1061 2508 473 499 1170 3532 161 161 304 307 525 568 387 397 845 1309 1009 2134 1295 5215 18 18 114 114 1066 2549 247 248 887 1477 1045 2389 270 272 455 476 239 240 406 417 328 332 1082 2676 998 2067 1037 2332 255 256 546 598 283 285 975 1924 177 177 1043 2370 471 495 702 886 692 862 1134 3150 125 125 437 454 720 929 881 1454 884 1466 762 1038 528 572 541 591 985 1986 499 533 23 23 75 75 65 65 866 1390 291 293 1251 4546 1024 2240 1141 3228 278 280 109 109 174 174 1193 3801 273 275 1030 2276 250 251 1209 3992 226 227 666 806 840 1290 871 1411 957 1821 1126 3074 1004 2100 809 1181 876 1433 731 955 452 473 559 618 1191 3770 1264 4734 242 243 718 923 458 479 707 898 1206 3959 608 698 1222 4158 120 120 733 961 "Econ" and "Bus" are the willingnesses to pay for economy and business class respectively. Hence you know perfectly the demand conditions in one-fifth of the market, and from this you must form an opinion about the properties of all 500 potential customers. You will work with these data for Q1–Q4 below. After completion of those questions I will release feedback together with a full description of all 500 customers' valuations. Prices and purchasing decisions. An airline specifies the number of seats (economy and business) and their corresponding ticket prices. Once prices are set, the 500 potential passengers arrive one by one. Each passenger looks at the prices, and picks the best option, subject to seat availability. If all seats in the preferred class are sold then the passenger moves to his second choice.3 QUESTIONS Begin with single-class medium-run operations, using materials from Session 4. (1) For its medium-run operation, Bigjet is free to choose any size of aircraft, and is also free to choose the configuration. However, Bigjet begins by evaluating the optimal profit-maximizing aircraft size and price for each single-class service. (a) Choose the size and ticket price for a single-class all-economy service. Predict your profit. (b) Choose the size and ticket price for a single-class all-business service. Predict your profit. Next consider the sale of multiple quality-differentiated products via a two-class aircraft. This uses material from Session 5. You might use the "upgrades" technique here. (2) For its medium-run operation, Bigjet now evaluates the optimal size, configuration, and profitability of a mixed-class aircraft. Choose the size, configuration, and pricing for this case. Once again, predict your profit. Now step back and consider the temporary operations in the short-run. (3) In the short-run, Bigjet has use of the 60 square metre aircraft. It could operate this as an all-business aircraft with 40 seats; an all-economy aircraft with 120 seats; or an intermediate mixed configuration. Bigjet evaluates the different possible configurations by considering steps of five business-class seats . That is, it evaluates configurations with 0, 5, 10, 15, 20, 25, 30, 35, and 40 business-class seats. Using the remaining space for the economy cabin, these configurations allow, respectively, for 120, 105, 90, 75, 60, 45, 30, 15, and 0 economy class seats. For each of these nine possible configurations, predict the prices of economy and business-class seats that would successfully sell out the aircraft. (4) Choose the optimal configuration of this short-run aircraft. Predict your profit. Finally, your long-run considerations build upon the material from Session 6. (5) For the long-run following Fastair's entry, you need to specify the size and configuration of your aircraft. Remember: Fastair's aircraft size and configuration are chosen by a profit-maximizer. These choices are in a sealed envelope. Fastair chose them expecting to be faced with another profit-maximizing competitor. To make life easier, I will compute the prices that ensure both aircraft are full. (a) Suppose that Fastair (like you) operates a mixed-class aircraft. Choose your aircraft size and configuration. Predict the economy-class and business-class prices, and predict your profit. (b) Now suppose instead that Fastair (unlike you) is restricted to offering only an economy-class service. Choose your aircraft size and configuration. Predict the economy-class and business-class prices, and predict your profit. (6) For operation in the very long run, provide a valuation of how much the innovation is worth to Bigjet (express this in terms of extra-profit-per-flight). Explain how this breaks down into (a) the direct cost saving, and (b) any strategic effects.GROUP ASSIGNMENT 2 SUBMISSION, Q1 TO Q4: GROUP = Question 1: Medium-Run Monopoly Operation (for after Session 4) (i) Economy class only: Number of economy seats Price of economy ticket Predicted profit (ii) Business class only: Number of business-class seats Price of business-class ticket Predicted profit Question 2: Medium-Run Monopoly Operation (for after Session 5) Mixed-class aircraft: Number of economy seats Price of economy ticket Number of business-class seats Price of business-class ticket Question 3: Predicting Prices for Mixed Configurations (for after Session 5) Economy seats 120 105 90 75 60 45 30 15 0 Business-class seats 0 5 10 15 20 25 30 35 40 Economy price Business-class price Question 4: Short-Run Monopoly with a 60 sq m Aircraft (for after Session 5) Short-run configuration Number of economy seats Price of economy ticket Number of business-class seats Price of business-class ticket Predicted profit6 GROUP ASSIGNMENT 2 SUBMISSION, Q5 AND Q6: GROUP = Question 5: Long-Run Duopoly Operation (for after Session 6) (i) Fastair offers both classes: Number of economy seats Predicted economy price Number of business-class seats Predicted business-class price Predicted profit (ii) Fastair is economy-only: Number of economy seats Predicted economy price Number of business-class seats Predicted business-class price Predicted profit Question 6: Very Long-Run Valuation of an Innovation (for after Session 6) Total value of the innovation Direct cost saving Strategic effect