Question

Suppose United and American both service the New York-Boston route. If they both charge $100 each way, they each get monthly profits of $81 thousand. If they both charge $200 each way, they get monthly profits of $112 thousand. If United (American) charges $100 and American (United) charges $200, then United’s (American’s) profits are $123 thousand and American’s (United’s) profits are $58 thousand and vice versaUsing a payoff matrix determine the Nash equilibrium:

Answer 1

Nash equilibrium exists when both companies charge $100 per ticket and each makes $81,000 in profits.

Step-by-step explanation:

United

ticket price $100 ticket price $200

$81,000 / $58,000 /

ticket price $100 $81,000 $123,000

American

$123,000 / $112,000 /

ticket price $200 $58,000 $112,000

United's dominant strategy is to charge $100 per ticket price with expected profits of $81,000 + $123,000 = $204,000. If it charges $200 per ticket, expected profits = $170,000.

American's dominant strategy is to charge $100 per ticket price with expected profits of $81,000 + $123,000 = $204,000. If it charges $200 per ticket, expected profits = $170,000.

Since both companies' dominant strategy is to charge $100 per ticket, then that is the Nash equilibrium.