3) In the Castorian Airline market there are only two firms. Each firm is decidi

Question

3) In the Castorian Airline market there are only two firms. Each firm is deciding whether to offer a frequent flyer program. The annual profits (in millions of dollars) associated with each strategy are summarized in the following table (where the first number is the payoff to Airline A and the second to Airline B): a) Does either player have a dominant strategy? Explain. b) Is there a Nash equilibrium in this game? If so what is it? c) Is this game an example of the prisoners' dilemma? Explain Airline B With Frequent No Frequent Flyer Program Flyer Program 200,160 Airline A Flyer Program NO Frequent | 160,280 | 240, 200

Explanation / Answer

a) Yes, both players have a dominant strategy i.e. to offer a frequent flyer program (This is because no matter what decision the other player takes, the firm taking a decision is better off when it offers a frequent flyer program)

b) Yes, there is a Nash equillibrium. Both airlines would offer a frequent flyer program. (Dominant strategy of both the firms)

c) Yes, this is an example of the prisoners' dilemma, the optimal solution (i.e. both do not offer frequent flyer program and maximize their total payoffs) is not chosen because of the non-cooperative nature of the game.

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