core: 0 of 1 pt 44 of 58 (40 complete) HW Score: 63.796, 57 oncept: Bargaining 3
ID: 1107478 • Letter: C
Question
core: 0 of 1 pt 44 of 58 (40 complete) HW Score: 63.796, 57 oncept: Bargaining 3 Questi 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? Raise Fares AA: $700 SW: $700 A. B. C. D. E. The game does not have a Nash equilibrium. American will leave fares unchanged and Southwest will leave fares unchanged American will leave fares unchanged and Southwest will raise fares. American will raise fares and then Southwest will raise fares American will raise fares and then Southwest will leave fares unchanged SW Raise Fares AA: $400 SW: $800 Fares Raise FareAA: $800 SW: $400 Fares Unchanged SW AA: $525 SW: $525 FaresExplanation / Answer
1.
In Nash equilibrium both parties involved in the game are better off. Small firms will follow dominant strategy that is they should follow large firms which acts as a leader. Because small firms are unable to influence price of the market.
Hence the correct option is D
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