As a New York business owner who does a lot of flying,you are keenly aware of even small changes in airfare from New York to Chicago.You have flown this route long enough to know that each airline is essentially a perfect substitute for the others.You notice that every time the largest airline changes the price,smaller airlines follow,but the smaller airlines are always priced slightly below the fare of the largest airline.This industry could BEST be described as one with:

A) price wars.
B) nonprice competition.
C) cartel behavior.
D) price leadership.

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Patrick Bodkin JR · Accepted Answer

Final Answer : D, Explanation :  The fact that smaller airlines always price slightly below the fare of the largest airline indicates that the largest airline is a price leader in this industry. The smaller airlines are following the lead of the largest airline in setting their prices. This is not a price war since the airlines are not engaged in a destructive competition to undercut each other's prices. It is also not nonprice competition since the airlines are not competing on factors other than price. Cartel behavior implies collusion among competitors to fix prices and restrict output, which is not evident in this scenario.

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