Question

A flight route is served by American Airlines (AA) and Southwest Airlines (SW). Suppose American is the industry leader American will decide whether to raise airfares, and then Southwest will decide whether to match the price increase. What is the Nash equilibrium of the game?

a. The game does not have a Nash equilibrium.
b. American will leave fares unchanged and Southwest will leave fares unchanged
c. American will leave fares unchanged and Southwest will raise fares
d. American will raise fares and then Southwest will leave fares unchanged
e. American will raise fares and then Southwest will raise fares.

Answer 1

The correct answer is letter "B": American will leave fares unchanged and Southwest will leave fares unchanged.

Step-by-step explanation:

Named after American mathematician John Nash (1928-2015), the Nash equilibrium explains how groups of people or individuals make choices that will affect other parties' choices. Nash equilibrium refers to a condition in which every participant has optimized its outcome based on the other player's expected decision. Eventually, an individual cannot receive benefits from changing actions, assuming that the other parties do not make any changes as well.