The Bertrand Model Oligopolies

The model is set up on a simple network structure consisting of three airports, A, B and H, served by two competing airlines, marked by 1 and 2, Fig. 1. Although, there are a large number of airlines in the market, looking at the individual route between airport-pair markets, the number of competitors is significantly smaller. Other than monopoly routes, the reminder routes are predominantly served by just two airlines because of economic attractiveness of that route, (Burghouwt and de Wit, 2015). However, the airline industry is inherently oligopolistic. For simplicity purposes, oligopolies are often studied by analyzing duopolies because they offer better tractability of what strategies airlines follow and their interactions.
In the model
An airline’s practice in determining prices in reality is much more complex and the airline has an ability to raise the price in order to raise its revenue. However, the common airline’s pricing strategy is to offer a limited number of seats at the lowest price on the flight and this price is equal to the marginal costs. All other seats are offered at the higher price than marginal costs. Having in mind that the Bertrand model of competition set up the prices and the competitive outcome would occur with a price equal to marginal cost, it is justified to determine the lowest price that will maximize the airlines profits. In this way, the price is determined by the market, so airlines and passengers cannot individually influence the price, but they take the price as given. Together with the assumption that the airlines are operating in the opened market and that they are free to enter and exit without having to incur additional cost model meets the requirements of a competitive market even though there is only two
For the purpose of this research, the function of unit flight cost (cost per available seat mile, ¢/ASM) was developed. The developed cost function estimates the unit flight cost for different sizes of aircraft and it is derived from the data covering airline operating cost in the period from 2007 to 2009, (Aircraft commerce, No.51, No.57 and No.64). The total number of different aircraft whose flight unit costs are used for getting the unit cost curve amounts to 27. This set includes different types of aircraft, both in terms of seat capacity (50 to 520 seats), and in terms of range (short-, mid- and long-distance). The total cost of flight includes costs for fuel, maintenance, pilots and cabin crew salaries, purchasing/leasing aircraft and other