Southwest Airlines is a major carrier based in Texas,
and has made a strategy of cutting fares drastically on
certain routes with large effects on air traffic in those
markets. For example on the Burbank–Oakland route
the entry of Southwest into the market caused
average fares to fall by 48 per cent and increased
market revenue from $21,327,008 to $47,064,782
annually. On the Kansas City–St Louis route,
however, the average fare cut in the market when
Southwest entered was 70 per cent and market
revenue fell from an annual $66,201,553 to
$33,101,514.
Questions
1 Calculate the PEDs for the Burbank–Oakland and
Kansas City–St Louis routes.
2 Explain why the above market elasticities might not
apply specifically to Southwest.
3 If Southwest does experience a highly elastic
