Consider the following static airline game. Two airlines, Delta and American Air
ID: 1189084 • Letter: C
Question
Consider the following static airline game. Two airlines, Delta and American Airlines, compete setting prices for the route Columbus-Chicago on Tuesdays at 7:20PM. There are 60 potential passengers with a reservation price of $500 and 120 additional passengers with a reservation price of $220. Assume that price discrimination is not possible (perhaps for regulatory reasons or because the airlines don’t know the passenger types). The costs are $200 per passenger. Assume that airlines must choose between a price of $500 and a price of $220. Assume that if equal prices are charged, the passengers are evenly shared but that the low-price airline gets all the passengers otherwise.
a. Write the pay-off matrix of this static game.
b. Find the two Nash Equilibrium(s) using the pay-off matrix in part a. Are these equilibrium in dominant strategies? Why is “both airlines charging a low price” an equilibrium?
c. Provide an intuitive explanation on which equilibrium you might expect to see? What might cause both airlines to price low
Explanation / Answer
DELTA AIRLINE
American 220 500
220 1800,1800 3600, 0
500 0,3600 9000,9000
b) Two Nash equilibrium is to either both charges $220 or both charges $500
No these strategies are not dominant strategies as strategy of one player depends on what other player plays. There is no strategy that a player will play in this game irrespective of what other player plays.
'Both airlines charging low price' is a equilibrium because charging low price is like incredible threat to the other player.
c) Equilibrium that is expected to be seen is that both firms will charge low price because there is a threat from the other firm to charge lower price if one charges higher price. Thus in case of imperfect information scenario each firm will charge lower price.