Price theory

On August 18,1993, a fare war erupted. To initiate its new services between Cleveland and Baltimore, Southwest announced a $49 fare(a sizable reduction from the then standard rate of $300). It’s rivals, Continental and US Air, retaliated. Before long, the price was $19, not much more than the tank of gas it would then take to drive between the two cities-and the airlines also supplied a free soft drink. Evaluate the implications of such a price war for the three airlines.

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