Question

A case study in the chapter describes a phone conversation between the presidents of American Airlines and Braniff Airways. Let's analyze the game between the two companies. Suppose that each company can charge either a high price for tickets or a low price. If one company charges $300, it earns low profit if the other company also charges $300 and high profit if the other company charges $600. On the other hand, if the company charges $600, it earns very low profit if the other company charges $300 and medium profit if the other company also charges $600.

a. Draw the decision box for this game.
b. What is the Nash equilibrium in this game? Explain.
c. Is there an outcome that would be better than the Nash equilibrium for both airlines? How could it be achieved? Who would lose if it were achieved?

Answer 1

a. The decision box for this game can be drawn as follows: b. The Nash equilibrium in this game is when both companies charge a low price of $300. c. There is no outcome that would be better than the Nash equilibrium for both airlines.

Step-by-step explanation:

a. The decision box for this game can be drawn as follows:

b. The Nash equilibrium in this game is when both companies charge a low price of $300. In this scenario, neither company has an incentive to change its price because if one company charges a high price of $600, it will earn a very low profit if the other company charges $300 and a medium profit if the other company charges $600.

c. There is no outcome that would be better than the Nash equilibrium for both airlines. If one company decides to charge a high price of $600 while the other company charges a low price of $300, the company charging $600 will earn a high profit while the other company earns a low profit. If both companies charge a high price of $600, they will earn a medium profit. Therefore, the Nash equilibrium is the best outcome for both airlines.