Reference no: EM133170408

Case Analysis. This part of the exam consists of a mini-case followed by three questions. The questions have maximum word limits; your answers can be shorter. (This mini-case may contain factual errors for conciseness or simplicity.)

In 2004, rising fuel costs led passenger airlines to seek additional sources of revenue. One potential source was a "fuel surcharge" paid by passengers in addition to the ticket price. British Airways and Virgin Atlantic Airways both adopted fuel surcharges on their transatlantic flights. However, like ticket prices, fuel surcharges are subject to price competition between airlines.

Managers at British Airways contacted Virgin Atlantic to discuss the fuel price situation and fix surcharge rates. Subsequently, fuel surcharges on transatlantic flights increased from £5 to £60. Other airlines, who had not participated in the earlier discussions, were also able to raise their fuel surcharges. The US Department of Justice and British government authorities both launched investigations. Because of the collusion with Virgin Atlantic, a US court imposed a $300 million fine on British Airways for anticompetitive behavior in violation of federal law.

Passengers who had paid fuel surcharges considered class-action lawsuits against the airlines. A British Airways customer service employee recounted dozens of calls from angered customers demanding refunds for past surcharges and threatening to never fly BA again. While condemning the illegal acts of collusion, the CEO of British Airways, however, defended the surcharges: "Our passengers... were not overcharged. Fuel charges are a legitimate way of recovering costs." Likewise, fuel suppliers found their airline clients who had adopted fuel surcharges to be less aggressive in their price negotiations than those clients who had not.

Question 1 (Word limit: 100)

Why were British Airways and Virgin Atlantic able to charge customers higher fuel surcharges after their discussions?

If the US government had not become aware of the collusion, which of the three public policy tools to combat monopoly (or here, perhaps, oligopoly) highlighted in class might the government have preferred? Why?